Explained: New ETF trading norms take effect today. What investors need to know
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New trading norms for exchange-traded funds (ETFs) will come into effect from September 7 (Monday), after the Securities and Exchange Board of India (Sebi) deferred the original September 1 implementation date by a week.
Sebi introduced the framework through a June 15 circular covering the base price, price bands, call auction in the pre-open session, and the close-out procedure for ETFs. On August 28, the regulator extended the implementation deadline following feedback from stock exchanges.
The markets regulator said the extension was intended to ensure the smooth implementation of the new provisions. The substantive provisions of the June circular remain unchanged.
What are the new ETF trading rules?
The framework sets out specific norms for how ETFs will be handled during the trading process, including how their base price and price bands are determined.
It also introduces a call auction mechanism during the pre-open session. Under a call auction, orders are collected during a specified period and then matched at a price that enables the maximum possible trading.
Sebi has also prescribed a close-out procedure for ETFs. This provides a framework for dealing with cases where obligations arising from trades cannot be completed through the normal settlement process.
Why has Sebi introduced these norms?
ETFs trade on stock exchanges in a manner similar to shares, but they typically hold underlying assets such as stocks, bonds, commodities or other securities.
Because ETFs combine exchange-based trading with underlying portfolios, their trading and settlement processes require specific mechanisms to address issues such as price discovery, trading limits and settlement failures.
The June circular by Sebi seeks to bring greater clarity and standardisation to these aspects of ETF trading, particularly the pre-open session, price bands and close-out mechanism.
What does the September 7 implementation date mean for investors?
The key takeaway for investors is that the new framework will apply from September 7.
Sebi has directed stock exchanges, clearing corporations and other market infrastructure institutions to put the necessary systems in place and make any required changes to their rules and regulations.
These institutions have also been asked to communicate the relevant provisions to market participants, including investors.
The August 28 update does not alter the substantive provisions of the June 15 circular. It only extends the implementation timeline by one week, with the new rules taking effect from today.