Problem Statement

Indian debt market has been illiquid due to low levels of secondary market transactions. Price discovery has consequently been a challenge. Until late 2013, the mutual funds industry was following a practice of valuing fixed income securities by applying a discretionary spread over rating category-duration yield matrices provided by AMFI-appointed agencies. This practice resulted in inconsistency of spreads across asset managers.

SEBI, vide its notification dated February 21, 2012, promulgated the SEBI (Mutual Fund) (Amendment) Regulations, 2012, whereby it inter alia mandated all mutual funds to value their investments based on principles of fair valuation. The valuation had to be reflective of the realisable value of the securities/assets and the asset management companies were responsible for true and fair valuation and correct computation of net asset value before the statutory cut-off timings.

Crisil Product/Solution Offering

Basis SEBI circular, Crisil engaged with the Valuation Committee of AMFI (ValComm) to derive security level pricing to bring in consistency for valuations of fixed income securities across the industry. Security level valuations created a framework based on objective and well-researched inputs for pricing of illiquid debt securities.

Crisil went live with security level valuations (SLV) in November 2013  for the mutual funds industry.

Impact

This practice resulted in standardization in the pricing of debt securities across portfolios for all asset managers. It eventually expanded to short-term money market instruments, helping capture the market risk associated with such instruments appropriately. 

The robust framework and quality output have stood the test of time over the past 10+ years across multiple interest rate and credit cycles. In recent years, appropriate and timely marking to market has supported mutual funds in managing redemption pressures during stressed market periods.

Over the last few years, other product segments such as the National Pension System, alternative investment funds and portfolio management services have also moved to this framework. Crisil currently work with 180 clients to provide valuations of their portfolios for different security classes.