ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has directed all asset management companies (AMCs) to comply with additional regulatory requirements for money market funds and income funds in line with the policy recommendations of International Organization of Securities Commissions (IOSCO) and international best practices. T
he SECP believes these regulatory reforms, which encompass the key principles of liquidity and credit risk, will ensure protection of unit holders’ interests and enhance the safety and soundness of the mutual funds industry during periods of market distress.
The AMCs are required to invest at least 10% net assets of money market funds in cash and T-bills that can be readily converted into cash to meet reasonably anticipated redemption requests. As per the new requirements, the AMCs shall conduct appropriate stress testing on the portfolios of Money Market and Income Funds based on certain hypothetical and/or historical events, such as rise in short-term interest rate, an increase in redemptions, a downgrade or series of downgrades in rating of portfolio securities, or credit event etc. The new stress testing requirement is intended to make mutual funds assess their liquidity position under adverse market conditions.
In addition to requiring mutual funds to invest in instruments awarded with specified external credit ratings, the SECP has required AMCs to carry out their own internal credit assessment using an internal rating process without sole reliance on external credit ratings to minimize credit risk. The AMCs shall also establish procedures to identify their clients who, based on past behavior and needs, may pose a large redemption threat to the funds under their management and make necessary liquidity arrangements to cater to such requests.
