Funds seek ‘parking’ help to counter redemption pressure
MUMBAI: With liquidity in the market drying up towards the fiscal close, the practice of 'holding period return' has returned to the certificate of deposit market.
Five market participants ET spoke with confirmed the existence of such trades, which may be flouting some regulatory norms and increasing the risk for investors. The mechanism -- also known as "parking" or "river crossing" -- is a financial manoeuvring in which mutual funds connect with cash-rich entities to tide over redemption pressure with the help of intermediaries.
It is generally seen towards the end of a financial year and involves four parties: the issuer of CDs, ultimate subscribers, cashrich entities such as banks and companies that provide parking space, and intermediaries. "This typically happens every financial year-end," said Dhirendra Kumar, CEO of mutual fund portal Value Research. "It is an institutional madness because everybody thinks alike."
Between January and March, CD rates have spiked 50-75 basis points both in the three-month and one-year maturity brackets, as banks aggressively raise money to shore up their deposits ahead of the year-end.
At the same time, mutual funds, the biggest buyers of CDs, face redemption pressure in their liquid and ultra short-term funds from lenders who want to avoid setting aside any extra capital for MF exposure for the purpose of capital adequacy ratio calculation.
At this point, some intermediaries or brokers connect a few cash-rich entities, be it banks or corporates, which extend funding support to MFs by temporarily buying the three-month CDs at typically 9.60-9.90% range at the far end of March quarter from issuers.
In earlyApril, CDs are sold by the financing entities to MFs at a predetermined price. The price is derived in such a manner that the financing institute gets 22-23% annualised return for a period of five-seven days. Those reverse trades are reported in the FIMMDA trading platform.
"Selling and buybackof CDs at pre-determined rates are prohibited," said Manoj Rane, managing director and head of fixed income and treasury, India, at BNP Paribas. "Prevalence may not be widespread. In case CD funding is happening, it will be evident when reversal of trades takes place in early April at off-market rates." A weak or two ago, a mid-sized private bank lent about Rs 3,000-5,000 crore to some big and small MFs, a trader in the know told ET.
The total volume of such trades ranges between Rs 20,000 crore and Rs 40,000 crore towards every yearend. The situation generally corrects in April as issuances recede. MFs also receive money back from banks in their liquid funds. Consequently, CD rates in the first week of April come off by 50 to 150 bps.
At present, the three-month maturity CDs of a weaker state-owned bank are offering rates in the 9.8-9.9% range. However, the market expects these CDs to trade between 8.5% and 8.75% in first week of April, typically 50-75 bps higher than the repo rate. The repo rate, at which banks borrow from the Reserve Bank, is currently 8%. Even after considering a 23% HPR or holding period return to the financing institute, the ultimate buyer - an MF--would get a rate close to 9%, which is higher than the expected prevailing rates in April, traders said.
Since mutual funds are allowed by capital markets regulator SEBI to borrow a maximum of 20% of scheme AUM (asset under management) to meet redemptions, such HPR trades give MFs a flexibility to run leveraged positions informally. In some cases, this spikes as high as 50% to 100% of the scheme AUM, traders said, adding that a fund house is indirectly borrowing funds from such parking facilitators
Source>> Economics Times
Thanking you
Regards,
Rajesh Kumar Kathpalia ¤ SMC Global
17,Netaji Subhash Marg,Daryaganj,
New Delhi-110002 Mobile No 9891645052
Email Id: rajesh.ipo@smcindiaonline.com
--
You received this message because you are subscribed to the Google Groups "Product Updates for AMC" group.
To unsubscribe from this group and stop receiving emails from it, send an email to Productupdatesforamc+unsubscribe@googlegroups.com.
For more options, visit https://groups.google.com/d/optout.
Five market participants ET spoke with confirmed the existence of such trades, which may be flouting some regulatory norms and increasing the risk for investors. The mechanism -- also known as "parking" or "river crossing" -- is a financial manoeuvring in which mutual funds connect with cash-rich entities to tide over redemption pressure with the help of intermediaries.
It is generally seen towards the end of a financial year and involves four parties: the issuer of CDs, ultimate subscribers, cashrich entities such as banks and companies that provide parking space, and intermediaries. "This typically happens every financial year-end," said Dhirendra Kumar, CEO of mutual fund portal Value Research. "It is an institutional madness because everybody thinks alike."
Between January and March, CD rates have spiked 50-75 basis points both in the three-month and one-year maturity brackets, as banks aggressively raise money to shore up their deposits ahead of the year-end.
At the same time, mutual funds, the biggest buyers of CDs, face redemption pressure in their liquid and ultra short-term funds from lenders who want to avoid setting aside any extra capital for MF exposure for the purpose of capital adequacy ratio calculation.
At this point, some intermediaries or brokers connect a few cash-rich entities, be it banks or corporates, which extend funding support to MFs by temporarily buying the three-month CDs at typically 9.60-9.90% range at the far end of March quarter from issuers.
In earlyApril, CDs are sold by the financing entities to MFs at a predetermined price. The price is derived in such a manner that the financing institute gets 22-23% annualised return for a period of five-seven days. Those reverse trades are reported in the FIMMDA trading platform.
"Selling and buybackof CDs at pre-determined rates are prohibited," said Manoj Rane, managing director and head of fixed income and treasury, India, at BNP Paribas. "Prevalence may not be widespread. In case CD funding is happening, it will be evident when reversal of trades takes place in early April at off-market rates." A weak or two ago, a mid-sized private bank lent about Rs 3,000-5,000 crore to some big and small MFs, a trader in the know told ET.
The total volume of such trades ranges between Rs 20,000 crore and Rs 40,000 crore towards every yearend. The situation generally corrects in April as issuances recede. MFs also receive money back from banks in their liquid funds. Consequently, CD rates in the first week of April come off by 50 to 150 bps.
At present, the three-month maturity CDs of a weaker state-owned bank are offering rates in the 9.8-9.9% range. However, the market expects these CDs to trade between 8.5% and 8.75% in first week of April, typically 50-75 bps higher than the repo rate. The repo rate, at which banks borrow from the Reserve Bank, is currently 8%. Even after considering a 23% HPR or holding period return to the financing institute, the ultimate buyer - an MF--would get a rate close to 9%, which is higher than the expected prevailing rates in April, traders said.
Since mutual funds are allowed by capital markets regulator SEBI to borrow a maximum of 20% of scheme AUM (asset under management) to meet redemptions, such HPR trades give MFs a flexibility to run leveraged positions informally. In some cases, this spikes as high as 50% to 100% of the scheme AUM, traders said, adding that a fund house is indirectly borrowing funds from such parking facilitators
Source>> Economics Times
Thanking you
Regards,
Rajesh Kumar Kathpalia ¤ SMC Global
17,Netaji Subhash Marg,Daryaganj,
New Delhi-110002 Mobile No 9891645052
Email Id: rajesh.ipo@smcindiaonline.com
--
You received this message because you are subscribed to the Google Groups "Product Updates for AMC" group.
To unsubscribe from this group and stop receiving emails from it, send an email to Productupdatesforamc+unsubscribe@googlegroups.com.
For more options, visit https://groups.google.com/d/optout.
Comments
Post a Comment
You are requested to mentioned your full name with email id while commenting.