ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) on Friday proposed certain measures to improve liquidity risk management in the open-end equity-oriented funds after consultation with the Mutual Funds Association of Pakistan (MUFAP).
According to an SECP statement, as per the requirements, all equity funds have to maintain at least 5 percent of net assets in cash and cash equivalents to meet immediate liquidity needs. All asset management companies (AMCs) have been directed to ensure compliance with this requirement by February 15.
“All AMCs on behalf of the funds shall be required to make arrangements with banks and development finance institutions (DFI) in advance for borrowing to deal with unexpected redemptions. However, the borrowing should not exceed 15 percent of net assets of the funds. All AMCs shall ensure compliance with this requirement by March 1,” read the new measures.
The requirements also include that in case where redemption requests exceed 10 percent of the total number of units in issue of the fund on any dealing day, the redemption requests of AMCs and their sponsors shall have the last priority in redemption on that day.
The SECP advised the MUFAP to review illiquid securities in lieu of best international practices regarding codification of such securities in the context of open-end funds and to develop criteria for illiquid securities and maximum limit for holding illiquid securities in open-end funds.
This direction has been issued to meet the changing industry dynamics, implementing international best practices and safeguarding investors’ interest by deterring loss of investor confidence and thus stop erosion of assets under management. “The direction shall reduce the risk that funds will be unable to meet their redemption obligations and simultaneously mitigate dilution of remaining investors’ interests.”
