Mutual funds liquidate CDs to tackle redemption pressure

Fund sell-off pushes up yields of Certificates of Deposit in secondary market.

Caught in the Euro cross-fire, mutual funds have begun liquidating Certificates of Deposit (CDs) to meet the redemptions of the foreign institutional investors (FIIs).

FIIs are large investors in MFs, particularly in the debt markets schemes. FIIs are not allowed to invest directly in CDs. Traders said that redemptions were largely by FIIs driven by mounting risk aversion, as a consequence to the escalating Euro crisis.

The fund sell-off of CDs, in turn, resulted in pushing up CD yields in the secondary market, leading to a sharp divergence between secondary and primary markets rates. Six month CDs in the secondary markets are at 6.3 per cent now.

Buyers of the CDs are mostly banks — and they are doing so at steep discounts. CDs maturing in November are sold by some funds at yields as high as 6.3 per cent or well over the three month bulk deposit rates. The card rate for three-month bulk deposits range between 4.5 and 5 per cent, as of now, among the public sector banks.

However, banks continue to receive CD subscription from corporates at rates lower than the prevailing one-year term deposit rates.

On June 2, the State Bank of Travancore was able to raise Rs 290 crore at a weighted yield of 6.7 per cent.

Subscription to the CDs was mostly from cash surplus corporates, both private and in the public sector, traders said.

Some private sector corporates have opted to invest in public sector bank CDs, as capacity ramp up of investments continue to be on hold for some more time.

Credit lines

Corporates normally deploy internal resources in the initial stages of such investments, before drawing down their sanctioned credit lines. That credit lines have not been drawn down, was evident from the incremental CD ratio that is at minus 26 per cent now.

FIIs, in May, sold the equivalent of Rs 9,436 crore ($2.4 billion) of equities and picked up only Rs 2,450 crore ($535 million) of debt, almost entirely short-term instruments for liquidity purposes.

Yet, despite the FII selloff, liquidity in the markets remained under control. This was evident from the weighted average collateralised borrowing and lending obligations rates that remained well below the Reserve Bank of India's repo rate.

On Wednesday, the weighted CBLO rates were barely 5.2 per cent or 5 basis points below the RBI repo rate. (CBLO platform allows money market participants to lend overnight/term liquidity against a collateral of eligible securities.)

However, with advance tax outflows looming, short-term liquidity preference remained high.

Yield

As a result, the yield on the 91-day T-bill spiked to 5.20 per cent but was level with the 364-day T-bill cut-off yield, implying that the liquidity overhang could return to haunt the markets soon. This fear manifested in the 10-year YTM dropping to 7.49 per cent, down from last weekend's 7.58 per cent.

Source: http://www.thehindubusinessline.com/2010/06/08/stories/2010060851530600.htm

MF sellers watch out, SEBI's listening

Telemarketing agents soliciting customers by promising huge returns on mutual fund investments may do well to think twice before making tall claims. For, market watchdog the Securities and Exchange Board of India (Sebi) may be listening.

Capital market regulator Sebi, which administers mutual funds, is said to be contemplating various ways to weed out any kind of mis-selling by distributors, agents and relationship managers of the fund houses. The possible guidelines for the same are being drawn by Sebi, along with the National Institute of Securities Markets, an institution entrusted with the tasks of educating investors and market players.

The suggestions currently being deliberated include recording of sale or promotional calls that the executives, including those at fund houses and distributors, make to new or existing customers, a top official said. The fund houses would also need to audit these recordings periodically and report compliance to mutual fund industry body Amfi and Sebi on a periodic basis, the official said, adding that such compliance reports would be needed to be filed along with the remedial actions for all the mis-selling activities noticed in these recordings.

The distributors, although they agree that the mis-selling of products can be checked with these measures, are not very keen to adopt the practice, given the fact that their payouts have already gone down with the recent volatility in the market and scrapping of entry-loads on mutual funds.

But, Sebi seems to be firm on its position and the new guidelines, if implemented, would be part of its various investor protection measures taken in the mutual fund space. Recently, Sebi also asked fund houses to disclose all complaints received by them on their websites and also in their annual reports. Besides, it has cracked down on the expensive gifts and payouts by fund houses to distributors.

As per the Code of Conduct framed by Sebi for the MF space, “Mutual funds are required to monitor the activities of their distributors, agents, brokers to ensure that they don’t indulge in any malpractice or unethical practice while selling or marketing mutual funds units. “

Any non compliance with the Mutual Funds Regulations and Guidelines pertaining to Mutual Funds, especially guidelines on advertisements and/or sales literature and/or Code of Conduct shall be reported in the periodic meetings of the Board of the AMC and the Trustee (s) and shall also be reported to the board by the AMC(s) in their compliance taken reports and by the trustees in their half-yearly reports.”

Similarly, Amfi has also prescribed a code of conduct for MF intermediaries, under which the intermediaries should “follow the Code of Conduct” strictly and not indulge in any practice contravening it directly or indirectly. “Non compliance with the Code of Conduct shall be reported by the MFs to the board and Amfi. Further, no MF shall deal with intermediaries contravening the prescribed Code of Conduct,” the Code says.

Source: http://economictimes.indiatimes.com/MF-News//articleshow/6018378.cms