Mutual fund houses will perform a self-assessment of their risk management framework and submit a report to their Board along with the roadmap for the implementation of the framework. The revised framework will come into effect from January 01, 2022. However, AMCs can choose to adopt the provisions of the circular before the effective date.<\/p>\n\n\n\n

Governance and organization of Risk Management Framework<\/strong><\/p>\n\n\n\n

SEBI in its circular has stated that risk management will be an independent and specific function of the AMC. AMCs will appoint a CXO level officer who will be responsible for the risk management of specific functions of the AMC\/Mutual Fund. For instance, there should be dedicated risk officers for various key risks such as Chief Investment Officer to manage investment risk, Chief Compliance Officer to manage compliance related risk, Chief Operating Officer to manage operational risk, Chief Information Security Officer for cyber security, etc.<\/p>\n\n\n\n

In addition, the AMCs will appoint a Chief Risk Officer (CRO) who would be responsible for the overall risk management of the mutual fund operation including the key risks.<\/p>\n\n\n\n

However, for the overall risk management of the mutual fund, along with the management, both the board of AMC and trustees will also be responsible. For this purpose, both the AMC and the trustees should mandatorily have separate Risk Management Committees (RMCs).<\/p>\n\n\n\n

These committees will undertake annual review of RMF at both AMC and scheme level. The CRO should be part of the RMCs. The RMCs will report to the Board of AMCs and trustees respectively and also recommend long term solutions regarding risk management, both at the AMC level as well as the scheme level.<\/p>\n\n\n\n

SEBI circular further states that there should be clear differentiation between the roles and responsibilities of the respective CXOs and the CRO. The CRO or the risk management function of the CRO cannot be entrusted with day to day functioning, the responsibility for which will lie with the respective CXOs.<\/p>\n\n\n\n

Furthermore, the AMC should maintain risk metric for each mutual fund scheme. The risk metric should incorporate each type of key risk like investment risk, liquidity risk, credit risk, etc. along with the path to maintain the targeted risk level. The metric may incorporate evaluation of risk levels vis-a-vis an appropriate benchmark, wherever applicable.<\/p>\n\n\n\n

The RMCs should meet at least once in a quarter to review various risks including risk metrics at both the scheme and the AMC level and assist the board of AMCs and trustees in discharging their duties in this regard.<\/p>\n\n\n\n

In a nutshell<\/strong><\/p>\n\n\n\n

SEBI had first introduced the risk management framework in September 2002. However, that did not deter some mutual fund houses from taking excess risk. It remains to be seen if SEBI’s review of the risk management framework can discourage such mutual fund houses\/schemes from taking investors’ interest for granted.<\/p>\n\n\n\n