The Securities and Exchange Board of India (SEBI) Monday announced RMF or a new risk management framework for the mutual fund market. The framework defines the risk management procedures, functions, and roles & responsibilities that the management must follow.
In a circular by SEBI, it said that at least one CXO (Chief Experience Officer) level officer who can be entrusted with the responsibility of risk management of definite functions related to MFs must be there. Also, the AMC must have a Chief Risk Officer (CRO) responsible for seeing to the overall operations related to risk management of mutual funds.
The Broad Categories of Risk Driven by AMC & Schemes
AMC-specific risks and scheme-specific risks are the two broad categories risk must be divided into. The scheme-specific risks will be again divided into credit risk, investment risk, governance risk, and liquidity risk.
The regulators of AMC have suggested as many as 8 different categories that will comprise talent risk, outsourcing risk, and operational risk to name just a few.
So that credit risk can be managed effectively, the AMC must possess a framework that is robust and has documented and approved policy related to Credit Risk Management.
SEBI also said that if a formal procedure is in place that can carry out credit assessments of own assets, reliance or dependence on the credit rating agencies can be minimized.
As such, AMCs must have a proper policy in place and a system to carry out an in-house credit risk assessment, debt due diligence, and that of all the money market instruments.
Aspects of Risk Management
Important aspects of risk management include monitoring as well as measuring the liquidity risk. It also said that it is normal for all securities not to be saleable when market conditions are tight and the sale of securities does not take place at or near the actual or real values.
SEBI also added in its circular that stress testing must be made mandatory and should be conducted for all the schemes, except the close-ended and interval schemes, at least once a month. Also, the results obtained from the stress tests must be placed before the trustees every quarter.
It also said that AMCs will be held responsible for any mis-selling carried out by any person associated with mutual fund selling, which will also include the distributors.
The prevailing or current system of risk management will be from January 1st, 2022 be “repealed” and thereafter the AMCs will be required to adhere to the new RMF.
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