India’s market regulator is considering setting up a “backstop facility” to help purchase relatively illiquid investment-grade corporate bonds from mutual funds to ease stress in debt schemes.
“The backstop facility would be an entity, which can trade in relatively illiquid investment-grade corporate bonds and be readily available in times of stress to buy such bonds from market participants in the secondary market,” said Ajay Tyagi, chairman of the Securities and Exchange Board of India. “Of course, a broad general guiding principle for any such entity to be set up, the market participants should have skin in the game and the moral hazard problem ought to be satisfactorily addressed.”
Earlier this year, mutual funds witnessed significant redemption pressure in several debt-oriented schemes, forcing them to sell the more liquid securities. Franklin Temple Mutual Fund wound up six of…
