Open-ended mutual funds will become tradeable on the stock exchanges by the end of this year, which is expected to ease liquidation of assets as well as provide the market with liquidity support.
Regulatory bodies have been dwelling on if transactions in MF units should be allowed on the exchange's main boards or alternative trading boards (ATB).
The Dhaka Stock Exchange (DSE) has already geared up for trading in the MFs on its ATB, while the Chittagong Stock Exchange (CSE) has completed preparation for the launching of ATB shortly.
"We are working to list open-ended MFs on our ATB," said CSE acting managing director Md. Ghulam Faruque.
The securities regulator, however, thinks that trading in open-ended MFs will be more vibrant and market supportive if the unit buy-sell takes place on the main boards of the exchanges.
In a recent meeting with the bourses, officials of the Bangladesh Securities and Exchange Commission (BSEC) spoke in favour of introducing trade in such securities on the main boards.
BSEC Commissioner Prof Mizanur Rahman said the workloads of asset management companies (AMCs) would be lower if a significant number of investors purchased or surrendered MF units through the exchanges' trading platforms, rather than going to the offices of the asset managers.
He added that the stock market would get liquidity support too if such funds were transacted on the main boards.
Concerns over price volatility
Fund managers oppose the proposition, saying that trading on the main boards would give rise to price volatility whereas liquidation of assets close to net asset value (NAV) is what makes the open-ended MFs more popular than listed MFs.
They would like to see transactions in open-ended MF units remain unchanged - between AMCs and unit holders.
If open-ended MF units trade on ATB, the responsibility of redemption will lie with AMCs. On the other hand, transactions on the main boards will be done between unitholders/investors.
The BSEC commissioner assured that there would be no scope of executing trades below NAV. If the market price of an open-ended MF goes down NAV, unit holders will go to the AMC that will repurchase assets at NAV, he said.
At present, an asset manager raises fund from investors, issuing units at a face value of Tk 10 or Tk 100. Later, when the portfolio value gains through investments, the asset manager is required to fix the re-issue price of the units at up to 5 per cent below latest NAV.
And the surrender price is set at 1 per cent below the issue price.
If the NAV of an open-ended MF is Tk 100, then the issue price will be Tk 95 at its lowest, whereas the surrender price Tk 94.05.
The Central Depository Bangladesh Ltd. (CDBL) charges a fee if someone purchases or surrenders units of open-ended MFs via any stock broker. As a result, the cost of investments is very nominal.
If trades in the securities are executed through ATB or the main board of any exchange, the investment cost will increase a bit due to brokerage commission.
Talking to the FE, some asset managers spoke in favour of introducing trades on ATB, keeping the relationship between AMCs and unitholders intact.
Chief Executive Officer of EDGE Asset Management Ali Imam said a rise in investment costs would not matter if trading in units of the securities got expedited. But a valuation risk will arise if units of the funds are exchanged between investors.
In India, a separate platform has been created to facilitate trading in open-ended funds between unit holders and asset managers.
Changes to trading rules
Existing rules and regulations tied to open-ended MFs forbid trade on the main boards of the exchanges whereas ATB regulations allow trading in open-ended MFs.
"The securities regulator needs to bring changes to rules and regulations and define operational and technical aspects," said BSEC commissioner Prof Rahman, if trading were to begin on the main boards.
There is no bar on transactions in open-ended MFs on ATB, but the platform is not so active, he added.
Based on ATB regulations, the DSE has developed trading software for open-end MFs with support from a local vendor, including features needed for trade executions through stock brokers.
The bourse has already conducted User Acceptance Test (UAT) and mock test of the software.
Open-ended MFs gained popularity after the 2010-11 stock market debacle that led to huge price erosions of close-ended MFs. Listed MFs had become overpriced in the bullish market before the market crash.
The subsequent policy decisions, for example extension of the maturity period of listed MFs, further destroyed investors' confidence in listed MFs.
That is the backdrop to a rise in open-ended MFs to 85, while the growth of listed funds slowed down to 36.
Source: The Financial Express
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