Potential Risk Class Matrix for debt schemes based on Interest Rate Risk and Credit Risk
Summary
This circular introduces a Potential Risk Class (PRC) matrix for debt schemes based on maximum interest rate risk and credit risk. It mandates that all existing and new debt schemes be classified into one of nine cells within this matrix to disclose potential risks to investors. The classification relies on Macaulay Duration for interest rate risk and Credit Risk Value for credit risk, with specific thresholds defined in the document. Paragraphs 17 through 29 define the maximum risk limits for debt schemes, specify treatment for perpetual bonds and callable instruments, and mandate disclosure requirements. Paragraphs 26 and 28 establish a compliance deadline of December 1, 2021, for portfolio rebalancing and circular applicability. The section concludes with the legal basis for the circular under Section 11(1) of the SEBI Act.
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all debt schemes also be classified in terms of a Potential Risk Class matrix consisting of parameters based on maximum interest rate risk (measured by Macaulay Duration (MD) of the scheme) and maximum credit risk (measured by Credit Risk Value (CRV) of the scheme).
they have full flexibility to place single/multiple schemes in any cell of the Potential Risk Class matrix (PRC).
each scheme shall be placed in one of the 9 cells specified at Table 2 below, while retaining their existing scheme category as specified in SEBI circulars on ‘Categorization and Rationalization of Mutual Fund Schemes’.
any change in the positioning of the scheme into a cell resulting in a risk (in terms of credit risk or duration risk) which is higher than the maximum risk specified for the chosen PRC cell, shall be considered as a fundamental attribute change of the scheme in terms of regulation 18(15A) of SEBI (Mutual Fund) Regulations, 1996.
the Mutual Funds shall inform the unitholders about the abovementioned classification in one of the 9 cells and subsequent changes, if any, through SMS and by providing a link on their website referring to the said change.
the AMC shall choose the PRC cell at the time of filing of Scheme Information document (SID) with SEBI.
The thresholds across the matrix would determine the maximum interest rate risk and the maximum credit risk which the scheme would be permitted to take but the scheme would have the flexibility to move downwards on the risk scale.
Class I: MD<= 1 year; Class II: MD<=3 years; Class III: Any Macaulay duration
Class A: CRV >=12; Class B: CRV >=10; Class C: CRV <10
The Credit Risk Value of the scheme shall be the weighted average of the credit risk value of each instrument in the portfolio of the scheme... Similarly, Macaulay Duration at the scheme level shall be the weighted average of the Macaulay Duration of each instrument...
The debt securities of schemes are to be assigned a value for credit risk in the following manner: G-Sec/ State development loans... 13; AAA 12; AA+ 11; ... Below investment grade 1
For investment by mutual funds in instruments having short term ratings, the credit risk value shall be based on the lowest long term rating of an instrument of the same issuer... across credit rating agencies.
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Source: SecMarx — Potential Risk Class Matrix for debt schemes based on Interest Rate Risk and Credit Risk. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.