Association of Mutual Funds in India (AMFI) has come out with Standard Operating Procedure (SOP) to curb frontrunning menace in mutual fund AMCs. These procedures are like regulating AI powered robots with bamboo stick. New age securities market framework requires sate of the art technological barriers to detect, intercept and regulate frontrunning at all the three levels of AMCs, Brokers and Relatives of AMC employees and broking entities. Arming AMCs with Proprietary Broking license will do away with the menace emanating from broking entities.
AMFI has come out with following remedies to curb frontrunning:
- Tracking price movement of shares to be bought by mutual fund AMCs.
- Keeping an eye over AMC employees entrusted fund management and dealing.
- Reviewing communication log of fund management/dealing room personnel.
- Widening the ambit of SEBI (Prohibition of Insider Trading) Regulation.
- Terminating relationship with a broker in case of suspicious price movement.
- Sending fund managers and dealers on compulsory leave of 10 days in a year.
Most of the aforesaid measures ( to be implemented from November 2024 onwards) have been in practice since long. The AMCs usually keep a tab over price movement of stocks and average these out depending on market conditions. Equipping the department of fund management and dealing room with biometrics is very common. Some AMCs have put in place three layers of surveilance -biometric, facial recognition and voice modulation. At certain mutual fund AMCs even, shoes have to taken off and watch, pen, mobile instruments have to deposited in locker before entering into dealing room. Entire communication in the dealing room happens through recognized IP addresses and IVR equipped landlines. These measures are no doubt effective deterrents but in the era of AI, these have lost their significance.
In a recent deliberation, the Securities and Exchange Board of India (SEBI) has confessed that the real time data of options’ open interest is unavailable during market hours and therefore violation of open interest concentration at client level, broker level and clearing house level is difficult to be tracked at real time basis. It is therefore, that we will have to devise a mechanism to find real time solution to real time problem.
Corporates in general, send their key personnel at 10 days compulsory leave. This has been prevalent since nineties. AMCs are also practising this since long. The framework of regular disclosure of assets including securities market transactions by AMC personnel has been in place since decades. Yes, the PAN number-based tracking of key employees and their relatives is a new thing. It’s commendable.
The widening of SEBI (Prohibition of Insider Trading) Regulation and inclusion of not only the mutual fund officials but many others, both inside and outside the fund house is an important move. Anybody who has access to unpublished price-sensitive information of the AMC won’t be allowed to buy/sell mutual fund units as stipulated in insider trading regulation.
Although, AMFI has taken commendable steps to curb frontrunning at AMCs, the conversion of AMC dealing room into Proprietary Broking house would go a long way in minimising chances of leakage and manipulation at broker level.
