Market supervisory authority Sebi published on Monday a revised risk management framework for investment funds with certain mandatory and recommended elements.
Asset management companies (AMCs) should self-assess their risk management framework and practices and report to Sebi along with the roadmap to implement the framework, Sebi said in a circular.
This exercise must be completed and the necessary systems must be installed in the AMCs to allow compliance with the circular with effect from January 1, 2022. The AMCs can do this in advance.
The recommendations of the Mutual Fund Advisory Committee have been appropriately incorporated into the Revised Risk Management Framework (RMF), he added.
The review was required in the context of significant developments in the mutual fund industry and financial markets as a whole, including product innovation, investment in newer
asset classes, the distribution landscape, technology development, penetration and awareness of investors, elements of increasing risk, among others.
“With the overall objective of managing the key risks associated with the operation of mutual funds, the Revised Risk Management Framework (RMF) should include a set of principles or standards that include, but are not limited to, policies, procedures,
functions risk management and roles ” and responsibilities of the administration of ,
the Board of AMC and the Board of Trustees,” said the market regulator.
The AMC must annually review compliance with the framework and the Review reports should be submitted to the AMC Board of Directors and Trustees for review and appropriate instructions as appropriate.
Additionally, Trustees may submit findings and risk mitigation measures along with their comments on trustee semi-annual reports. to Sebi
“Risk management is intended to be a separate and specific function of the AMC,” said Sebi.
Sebi has established a detailed framework and broken down the specific elements of the RMM into “mandatory elements” to be implemented by the
AMC and “recommended elements” that address other industry leading practices that may be considered for implementation, divided.
“AMCs should establish an RMF for their mutual fund business,” Sebi said, highlighting its characteristics, including that the RMF should be structured, efficient, timely, dynamic and flexible enough to identify new risks.
The RMF for mutual funds has four components: governance and organization, risk identification, risk measurement and management, and risk reporting and related information.
Sebi has also established specific roles for various employees and said that RMF’s policy must be approved by the AMC Board of Directors and the Trustees.
In addition to defining the role of management, the regulator has called for a culture of risk awareness to be established throughout the company.
Sebi has assumed roles and responsibilities from AMC’s board of directors and trustees, the chief executive officer (CEO), the chief risk officer (CRO), the chief investment officer (CIO), the roles of other CXOs, and the fund manager.
Sebi has also identified several types of AMC-specific and program-specific risks and has established detailed guidelines to measure and manage them. AMC also needs a strong credit risk management framework, Sebi said.