What is waterfall valuation approach in debt mutual funds?
Sebi has recently asked mutual funds to adopt waterfall approach to value money market and debt securities.
The market regulator has laid down some broad principles that should be adopted as part of the waterfall approach to arrive at the security prices.
--All traded securities should be valued on the basis of traded yields, subject to identification of outlier trades by the valuation agencies.
--Volume Weighted Average Yield (VWAY) for trades in the last one hour of trading shall be used as the basis for valuation of government securities, including T-bills. Valuation of all other money market and debt securities, including government securities not traded in the last one hour, shall be done on the basis of VWAY of all trades during the day.
- In case of any exceptional events on a day, only VWAY of trades post such event may be considered for valuation. Further, all exceptional events along with valuation carried out on such dates shall be documented with adequate justification.
- All trades on stock exchanges and trades reported on trade reporting platforms till the end of the trade reporting time, excluding Inter-scheme transfers, should be considered for valuation on that day. The timing for disclosure of Net Asset Value (NAV) on website of respective AMCs and Amfi stands extended.
-Considering the importance of polling in the valuation process, guidelines shall be issued by Amfi on polling by valuation agencies and on the responsibilities of mutual funds in the polling process, as part of the waterfall approach.
-Valuation agencies shall identify the mutual funds which will participate in the polling process on a particular day, taking into account factors such as diversification of poll submitters and portfolio holding of the mutual funds. Mutual funds that are identified by the valuation agencies shall necessarily participate in the polling process. However, if a mutual fund does not participate in the polling process, detailed reason for the same should be recorded and made available during Sebi inspections.
-The minimum number of polls to be considered for valuation, along with the operational modalities of polling, should be specified.
-AMCs should have a written policy, approved by the board of AMC and Trustees, on governance of the polling process. The policy should include measures for mitigation of potential conflicts of interest in the polling process and shall identify senior officials responsible for polling.
-AMCs should ensure that participation in the polling process is not misused to inappropriately influence the valuation of securities. The officials of the AMC who are responsible for polling should also be personally liable for any misuse of the polling process.
-AMCs should maintain an audit trail for all polls submitted to valuation agencies.
-The waterfall approach should form a part of the valuation policy of individual AMCs and should be uploaded on the respective websites of AMCs. Amfi should ensure that the waterfall approach is also available on the website of the valuation agencies.
Sebi also said that to enable consideration of all trades during a day for valuation the present deadline would be extended to 11 pm for uploading the NAVs of all schemes (except for Fund of Fund schemes) on the website of Amfi and respective AMCs.
The market watchdog said AMCs are responsible for true and fairness of valuation and correct NAV. If an AMC decides to deviate from the valuation price given by the valuation agencies, the detailed rationale for each instance of deviation should be reported to the board of AMC and Trustees.