Markets regulator Sebi on Monday came out with revised risk management framework for mutual funds with certain mandatory and recommendatory elements.
Asset management companies (AMCs) need to perform a self-assessment of their risk management framework and practices and submit a report to Sebi along with the roadmap for implementation of the framework, Sebi said in a circular.
This exercise must be completed and the necessary systems must be in place at the AMCs to enable compliance with the circular with effect from January 1, 2022. AMCs may also choose to do so even before that.
The recommendations of mutual funds advisory committee have been suitably incorporated in the revised risk management framework (RMF), it added.
The review was necessitated against the backdrop of significant developments in the mutual fund industry and in the financial markets as a whole, including in the area of product innovation, investment in newer asset classes, distribution landscape, technological evolution, investor penetration and awareness, increase in risk elements, among others.
"With the overall objective of management of key risks involved in mutual fund operation, the revised Risk Management Framework (RMF) shall provide a set of principles or standards, which inter alia comprise the policies, procedures,risk management functions and roles & responsibilities of the management, the Board of AMC and the Board of Trustees," the markets watchdog said.
Compliance with the framework should be reviewed annually by the AMC and review reports has to be placed before the board of AMC and trustees for their consideration and appropriate directions, if any.
Further, the trustees may forward the findings and steps taken to mitigate the risk along with their comments to Sebi in the half-yearly trustee reports.
"Risk Management shall be an independent and specific function of the AMC," Sebi said.
Laying down a detailed framework, Sebi has segregated the certain elements of RMF into "mandatory elements" which should be implemented by the AMCs and "recommendatory elements" which address other leading industry practices that can be considered for implementation.
"AMCs shall establish a RMF for its mutual fund business", Sebi said outlining its characteristics which include that the RMF shall be structured, efficient, timely, dynamic and flexible enough to identify new risks.
The RMF of mutual funds shall comprise the four components-- governance and organization, identification of risks, measurement and management of risks and reporting of risks and related information.
Sebi has also laid out specific functions of various personnels and said that the the policy on the RMF shall be approved by the board of AMC and trustees.
The regulator, while defining the role of management, has also called for establishing an organization-wide risk-conscious culture.
Sebi has come out with roles and responsibilities of board of AMC and trustees, chief executive officer (CEO), chief risk officer (CRO), chief investment officer (CIO), role of other CXOs and fund manager.
Sebi has also identified various kinds of scheme-specific and AMC-specific risks and has stipulated elaborate guidelines for their measurement and management. Also, AMC must have a robust framework for credit risk management, Sebi said.
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