The Securities and Exchange Board of India (SEBI), on Thursday, asked asset management companies (AMCs) to have stress testing policy in place to conduct stress test on all liquid fund and money market mutual fund (MMMF) schemes, with immediate effect.
The market regulator also asked trustees of AMCs to report compliance and steps taken to deal with adverse situations faced, if any, in the half yearly trustee report submitted to SEBI.
“The stress test shall be carried out internally at least on a monthly basis, and if the market conditions require so, AMC should conduct more frequent stress test,” SEBI said in a circular to all AMCs.
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SEBI said that this would further strengthen the risk management practices. And, it would also help to develop a sound framework that would evaluate potential vulnerabilities on account of plausible events, it added.
This would also provide early warning on the health of the underlying portfolio of liquid fund and MMMF schemes, SEBI added.
The regulator said that the schemes would be tested on the risk parameters, such as interest rate risk, credit risk and liquidity & redemption risk
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While conducting stress test, it would be required to evaluate impact of the various risk parameters on the scheme and its net asset value (NAV).
Further, in the event of stress test revealing any vulnerability or early warning signal, it would be required to bring it to the notice of the trustees and take corrective action as deemed necessary, to reinforce their robustness.
“Each AMC should also be required to have documented guidelines, to deal with the adverse situation effectively,” SEBI added.
SEBI also asked the AMCs to review the stress test policy by the board of AMC and trustees, at least on an annual basis, in light of the evolving market scenarios, including the Integration of the stress testing framework in the day-to-day risk management processes.