Swing pricing is the concept news to address the issue arising due to frequent buying and selling activity within a fund which results in excessive fees that destroy the value of shareholders. It is the preferred mitigation technique against the dilution effect from redemptions and subscriptions. An Anti-dilution Technique that helps fund manage liquidity risk internally by effectively passing on transaction call to shareholders is called swing pricing. In this net asset value is adjusted either upwards or downwards Hindi case of net Subscription or redemption.
Securities and Exchange Board of India has issued a report[1] on consultation paper for the introduction of swing pricing today. Its objective is to solicit public comments, views on the proposal to introduce a swing pricing mechanism that will ensure the fairness of treatment of entering, exiting, and existing investors During market dislocation in mutual fund schemes.
As per the international organization of Securities Commission swing pricing refers to a process for adjusting funds' net asset value to effectively pass on transaction costs stemming from net capital activity to the investors associated with that activity during the life of the fund. This excludes the Termination or ramp-up period. Quoted bid and overall trading cost can be widened and may not be representative of the executive price that can be achieved in the market in our liquidity-challenged environment. That’s why swing pricing contributes to protect the interest of existing investors from diluting the holdings and protect the value of the investors' capital. This mechanism also protects the investors when the funds hold illiquid assets, more active trading takes place, investors choose to redeem when the actions have material market impact costs.
Swing pricing has two forms that are full swing pricing and partial swing pricing. When there is a material cost of accessing liquidity Then the implementation of swing Pricing becomes important. Association of Luxembourg fund industry has pointed out dad swing factors are often limited in magnitude in funds prospectus for example a cap of 2% And asset manager should have swing pricing policy document to highlight some other characteristics and parameters of the mechanism.
The consultation paper has an extensive study on global practices in different jurisdictions such as United States, Luxembourg, France, and United Kingdom. It has also studied certain aspects of swing pricing, such as on description on swing pricing commerce wing threshold, upper limit on swing factor and exit options of investors in different jurisdictions.[2]
Swing pricing will allow asset managers to achieve better equitable treatment of entering, exiting, and existing investors. It can materially reduce the risk of a run on funds and reduce first-mover advantages. It mitigates the impact on redemption on remaining investors as the value of find units is not diluted extensively And also protects remaining investors from the effects of the redemption activities. It reduces the run risk and potential asset fire sales.[3] There are also drawbacks to swing pricing. Swing pricing does not cover all liquidity scenarios adequately and only applies a percentage factor to larger flows, and even if the Swing pricing method is used large floors can still occur but may not be launched enough to initiate the pricing method. Accurately determining the cost that redeeming investors impose on fund and advisor appropriate minimum size or swing threshold may be a challenge to AMC. It is also a challenge to determine an appropriate parameter for swing pricing.
The consultation paper has stated the proposed framework of swing pricing. It is stated that during the normal time the applicability of swing pricing will be optional based on predetermined minimum swing threshold and maximum swing factor, which will be disclosed in the scheme information document along with the details necessary. During the market dislocation, the implementation will be in a phased manner this will be done to mitigate the risks of the uncertainty of whether swing pricing will apply or not, and since swing pricing applicability is specified small schemes may be at a relative disadvantage if it is threshold-based. Securities and Exchange Board of India will stipulate applicability of minimum swing factor and will also determine market dislocation based on the association of mutual funds in India recommendation or based on various other combination factors. the paper has also discussed challenges and applicable mittens and has welcome the public comments calling the aspects of the consultation paper.[4]
[1] https://www.sebi.gov.in/reports-and-statistics/reports/jul-2021/consultation-paper-for-introduction-of-swing-pricing_51234.html
[2] ibid
[3] ibid
[4] ibid
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