Informist, Monday, May 23, 2022

--SEBI: AMCs to appoint at least 2 market makers for ETFs

--Direct transactions with AMCs in ETFs for above 250 mln rupees

--Revised passive MF norms to come into effect from Jul 1

MUMBAI – The Securities and Exchange Board of India has issued additional guidelines for passive mutual fund schemes and modified certain existing norms, which will come into effect from Jul 1.

This comes at a time when passive funds are gaining popularity among retail investors.

In order to enhance the liquidity of units of exchange-traded funds on the stock exchanges, the regulator said that any order placed for redemption or subscription directly with a fund house must be more than 250 mln rupees.

SEBI also said that the swing pricing framework will not be applicable for debt ETFs, and the requirement of cut-off timing for applicability of net asset value will not be applicable for direct transactions with asset managers in ETFs by market makers and other eligible investors.

Swing pricing mechanism allows fund houses to adjust a scheme's net asset value in response to inflows and outflows.

According to the latest circular, asset managers will have to appoint at least two market makers for ETFs in order to provide continuous liquidity on the stock exchanges. These market makers will be members of the bourses.

These asset managers will have an approved policy regarding market making in ETFs based on SEBI's framework for the same. They will facilitate the creation and redemption of ETF units by market makers on a "best-effort basis", the circular said.

Asset management companies must put in place, a transparent incentive structure for market makers and these incentives will be linked to their performance in terms of generating liquidity in units of ETFs. Stock exchanges can also incentivise the market makers through liquidity enhancement schemes.

There shall be a proper audit trail for these scheme-wise incentives.

In order to make the market making process less capital intensive, SEBI has decided that net settlement between cash leg of transactions in units of ETFs by the market makers and consequent transaction in underlying basket of the ETFs will be implemented.

The asset managers will be allowed to create or redeem units of ETFs without upfront payment of 100% value of such units or upfront delivery of such units by the market makers. Exchange-traded funds will be allowed to buy or sell units without the same forming a part of the asset allocation of the scheme.

The tracking error or the annualised standard deviation of the difference in daily returns between the underlying index and the net asset value of the passive fund must not exceed 2% on the basis of rolling data for the past one year.

But this limit may be breached in circumstances that are unavoidable by the asset manager. In case this tracking error exceeds 2%, it shall be brought to the notice of the asset manager's trustees, and these fund houses must take corrective actions to keep the tracking error in check.

SEBI formulated the circular on the recommendations of the Working Group and the feedback received from the Mutual Funds Advisory Committee.

For debt exchange-traded funds and index funds, SEBI has laid down the following norms:

• Debt exchange-traded funds and index funds must be based on indices comprising corporate debt securities, government securities, treasury bills, state development loans, government securities, or a combination of these instruments
• Constituents of the index are aggregated at issuer level in order to determine investment limits for single issuer, group, sector, etc. These constituents shall have a defined credit rating and defined maturity and the same shall be specified in the index methodology
• Rating of the constituents of the index shall be of investment grade and above
• Constituents of the index shall be periodically reviewed at least on a half-yearly basis
• For an index with at least 80% weight of corporate debt securities, single issuer limit will be capped at 15%. 
• In case of change in constituents of the index due to periodic review, the portfolio of exchange-traded funds or index funds must be rebalanced within seven days
• In case the rating of any security is downgraded to below the rating mandated in the index methodology, the portfolio must be rebalanced within 30 days
• Asset managers have the option of launching either an active equity-linked savings scheme or a passive equity-linked savings scheme
• The nomenclature for exchange-traded funds or index funds shall include the name of the underlying index or goods
• The debt and equity exchange-traded funds will name and exposure to top seven issuers and stocks respectively as a percentage of the net asset value of the scheme on a monthly basis
• The minimum subscription amount at the time of new fund offer for debt exchange-traded funds or index funds will be 100 mln rupees. The minimum subscription amount for other exchange-traded funds or index funds is 50 mln rupees
• Alternative to launching a new fund offer for exchange-traded funds, the asset managers may contribute the initial fund for creating units. Subsequently, the asset manager can transfer the units of such exchange-traded funds to market makers or other investors.

End

Reported by Ajay Ramanathan

Edited by Ashish Shirke

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