Swinging to frenetic global market beat – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/swinging-to-frenetic-global-market-beat/articleshow/84621335.cmsSynopsis

Swing pricing increases or decreases the net asset value of a fund by a pre-announced swing factor, say, 2%, by loading the transaction costs of large exits on those exiting, and of large inflows on those entering, so as to protect the less fleet-footed investors.

The Securities and Exchange Board of India (Sebi) has proposed swing pricing in mutual funds schemes to protect investors in times of large inflows and, more likely, large exits. This is a useful tool, no doubt, but even more useful would be a deeper, broader and more active market in securities, particularly corporate debt. The move to let individuals trade in government bonds is welcome. But pension funds, insurance companies and other institutional players matter more. Once they start trading in bonds, the market would turn more liquid and volatility would tend to be more self-limiting than it is now.

Swing pricing increases or decreases the net asset value of a fund by a pre-announced swing factor, say, 2%, by loading the transaction costs of large exits on those exiting, and of large inflows on those entering, so as to protect the less fleet-footed investors. The tacit aim is to prevent a run on mutual funds and restore trust in MF schemes after the fiasco at the IL&FS and at Franklin Templeton. Rightly, Sebi wants to follow developed markets that use swing pricing. Sebi draws its inspiration on swing pricing from a 2018 report of the International Organisation of Securities Commissions (Iosco). But more needs to be done to have a deep and liquid debt market that will enable MFs to diversify and better manage their liquidity risk.

The secondary bond market in India is underdeveloped, with liquidity concentrated in high-quality paper. Market swings lead to risk aversion and widening of the spread on these bonds vis-à-vis the benchmarks. During market dislocation, the yield spreads are exaggerated, and swing pricing can bring some relief. Resort to swing pricing only when flows into or out of a fund exceed a threshold makes sense.

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