SEBI overhauls ETF trading framework, introduces dynamic price bands

Mumbai, June 15 (SocialNews.XYZ) The Securities and Exchange Board of India (SEBI) on Monday proposed a major overhaul of the framework governing exchange-traded funds (ETFs), introducing dynamic price bands, revised base price calculations, and new auction mechanisms to ensure ETF prices more accurately reflect the value of their underlying assets.

In a consultation, the market regulator said the changes were prompted by concerns that the existing ETF trading framework relies on reference prices with a one-day lag and fixed price limits that may not adequately capture movements in the value of underlying securities and commodities.

At present, equity, debt and commodity ETFs are traded within a fixed 20 per cent price band, while overnight ETFs are subject to a 5 per cent limit.

These limits are based on a reference price derived from the ETF's net asset value (NAV) from two trading days earlier.

Under the proposed framework, the base price for ETF trading will shift to the previous day's closing market price.

This will be calculated using the volume-weighted average price (VWAP) during the final 30 minutes of trading.

If no trades occur during that period, the last traded price will be used. If no trades take place throughout the day, the most recent available closing NAV will serve as the reference price.

SEBI has also asked stock exchanges and mutual fund houses to work together to address operational issues and facilitate the use of T-1 closing NAV as the base price from April 1, 2027.

The regulator has proposed replacing the current fixed-band structure for most ETFs with a dynamic price limit mechanism.

For equity and debt ETFs, excluding liquid and overnight funds, trading will initially be allowed within a 10 per cent band above or below the base price.

If trades reach or exceed 9.9 per cent of the limit, trading will enter a 15-minute cooling-off period.

Following the cooling-off period, the price band may be expanded by an additional 5 per cent of the base price.

This process can be repeated twice in the same direction, effectively allowing the trading band to widen up to 20 per cent during a session.

If the trigger occurs within the final 30 minutes of trading, the cooling-off period will be shortened to five minutes.

According to SEBI, any expansion of the trading band will apply across all stock exchanges and will be permitted only in the direction of the prevailing price movement.

Liquid ETFs and overnight ETFs will continue to operate under the existing fixed 5 per cent price band structure.

Source: IANS