Valuation of money market and debt securities
Summary
This circular updates the definitions of traded and non-traded money market and debt securities to align with current industry practices. It mandates security level pricing from valuation agencies for most instruments, while permitting amortized valuation for short-term securities under specific conditions. The document also clarifies valuation methods for government securities, options, and other derivatives. This section mandates a documented waterfall approach for valuing money market and debt securities, overseen by AMFI. It establishes specific valuation principles including the use of Volume Weighted Average Yield (VWAY) and guidelines for polling processes to ensure accurate pricing. Additionally, it defines protocols for NAV disclosure timing, handling deviations from agency valuations, and treating below-investment-grade or defaulted securities. This section mandates the replacement of NPA terminology with 'below investment grade or default' across various SEBI circulars and reporting formats. It prohibits Mutual Funds from using their own trades for valuing debt and money market securities or for inter-scheme transfers. The text establishes specific pricing protocols for
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Traded securities have trades in marketable lots on recognized exchanges or platforms; non-traded securities have no such trades.
A separate definition of thinly traded debt securities is not required and stands deleted as valuation methodology is same as non-traded.
Amortization based valuation is permitted for securities with residual maturity up to 30 days if within ±0.025% threshold of reference price.
With effect from April 01, 2020, amortization based valuation shall be dispensed with for all money market and debt securities.
All money market and debt securities with residual maturity over 30 days shall be valued at average of security level prices from valuation agencies.
Government Securities including T-bills shall be valued on the basis of security level prices obtained from valuation agencies irrespective of residual maturity.
Investments in short-term deposits and repo transactions with tenor up to 30 days shall be valued on cost plus accrual basis.
Prices for all OTC derivatives and market linked debentures shall be obtained from valuation agencies.
Securities with put/call options on same day and same price deemed to mature on that date; otherwise evaluated based on trigger dates.
If a put option is not exercised when it would be in favor of the scheme, justification must be provided to the Board of AMC and Trustees.
Provisions related to illiquidity risk approach and paragraphs 3, 4, and 5 of existing circulars stand deleted.
It is decided that for arriving at security level pricing, a waterfall approach shall be followed for the valuation of money market and debt securities.
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Source: SecMarx — Valuation of money market and debt securities. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.