Sebi asks MFs to adopt waterfall approach for money mkt, debt securities valuation

In order to bring uniformity and consistency in valuation, market regulator Sebi has asked mutual fund houses to follow "waterfall" approach for the valuation of money market and debt securities.

Under this approach, all traded securities would be valued on the basis of traded yields, subject to identification of outlier trades by the valuation agencies.

Besides, the regulator has come out with a framework relating to valuation of inter-scheme transfers and barred the use of own trades for valuation.

Further, the regulator said a money market or debt security will be classified as "below investment grade" if the long-term rating of the security issued by a credit rating agency (CRA) is below BBB- or if the short-term rating of the security is below A3.

A money market or debt security will be classified as "default" if the interest and/or principal amount has not been received on the day such amount was due or when such security was downgraded to "default" grade by a CRA.

In the case of default, mutual funds will have to promptly inform to the valuation agencies and the CRAs any instance of non-receipt of payment of interest and/ or principal amount (part or full) in any security.

In a circular issued on Tuesday, Securities and Exchange Board of India (Sebi) said, "for arriving at security-level pricing, a waterfall approach shall be followed for the valuation of money market and debt securities."