ISLAMABAD (January 10 2009): The Securities and Exchange Commission of Pakistan (SECP) has unveiled a fresh criteria for valuation of debt securities held by the Collective Investment Schemes (CIS) from January 10, 2009. The SECP has superseded Circular 6 of 2008 through a circular No 1 of 2009 issued on Thursday for mutual fund industry.
Under the new procedure, the value of debt securities held by the CIS will be determined in accordance with the methodology prescribed by SECP. The Mutual Fund Association of Pakistan (Mufap), based on the prescribed methodology, shall determine and disseminate the values of different debt securities on a daily basis and announce on its website.
As per new circular, debt security means any security issued by a company or a body corporate for the purpose of raising funds in the form of redeemable capital and includes Term Finance Certificates (TFCs), bonds, debentures, Sukuks, and commercial papers etc.
Owing to dormant debt securities market coupled with recent liquidity crunch, fair valuation of debt securities based on market traded data became unviable. Therefore, the traded volume based pricing mechanism for determining the fair value of debt securities had become ineffective.
However, to determine the daily true and fair Net Asset Value (NAV) of CIS, it is imperative to find out the fair valuation of debt securities held by CIS. In order to derive the fair valuation, Mufap after thorough review of international best practices submitted a valuation methodology and provisioning criteria for debt securities.
The SECP after refining the proposed methodology through a series of consultative meetings, has prescribed the same vide its Circular No 1 of 2009 for mutual fund industry. Adoption of the valuation methodology is aimed at bringing consistency across the mutual fund industry and is expected to lead to fair price discovery of debt securities.
THE DEBT SECURITIES HELD BY THE CIS WILL BE CLASSIFIED AS PER THE FOLLOWING CRITERIA:
TRADED SECURITIES: Debt securities that have a minimum trade volume of Rs 25 million during the 30 days period before the valuation date. Thinly Traded Securities:- Debt securities that have a traded volume of less than Rs 25 million during the 30-day period before the valuation date.
NON TRADED SECURITIES: Debt securities that have a traded volume below Rs 1 million during the 30-day period before the valuation date. Debt securities classified on this basis, shall be further categorised and valued accordingly. Rated – Debt security rating shall be used and where no such rating is available the rating of the issuing company or the body corporate shall be applicable. In case of more than one rating, the most conservative publicly available rating shall be used.
NON-RATED: issue where neither the debt security nor the debt issuing company or the body corporate is rated shall be classified as non-rated. An internal rating will be assigned by Mufap and such rating shall be a notch below the rating of a comparable issue/ issuer rating in the same sector/ industry. If a comparable issue/ issuer is also not available, the issue shall be treated below investment grade and valued as elaborated in “valuation of non-investment grade debt securities” mentioned below in Chapter 2.
For valuation of traded debt securities, all debt securities classified as traded securities shall be valued on the basis of their volume weighed average price during the fifteen (15) calendar days preceding their valuation date. In case of no trade during the last 15 days period, trades during the thirty (30) calendar days preceding the valuation date shall be used for the purpose of calculating the volume weighted average price.
THE PERFORMING INVESTMENT GRADE DEBT SECURITIES SHALL BE CLASSIFIED AS UNDER: Debt Securities with residual maturities to up to six months – Such non-traded and thinly traded debt securities shall be valued on the basis of amortisation to its face value.
Secondly, debt securities with residual maturities of over six months – Such non traded and thinly traded debt securities shall be valued in accordance with the yield matrix as explained. In case an investment grade debt security is classified as non-performing, the determined value shall be provided for in accordance with the Annexure II. According to the circular, the non-investment grade performing debt securities shall be valued at a discount of 25 percent to the face value.
In case of a non-investment grade debt security is classified as non-performing, the determined value (discount of 25 percent to face value) shall be provided for in accordance with the Annexure II. A risk free benchmark yield shall be built, for which yields published by Reuters (PKRV) for the government securities shall be grouped into following seven tenor (maturity) buckets.
