SEBI plans net settlement of MF cash market trades
The move to ease liquidity pressure on schemes: the proposed framework would allow netting only for outright transactions, which means either a purchase or a sale of a particular security, but not both, during the same settlement cycle
The Securities and Exchange Board of India (Sebi) has proposed to allow net settlement of funds for transactions conducted by mutual fund schemes in the cash market, while maintaining gross settlement for securities. This move aims to simplify business operations, enhance settlement efficiency, and reduce temporary liquidity requirements for mutual fund schemes.
Sebi's proposal, outlined in a consultation paper, seeks to address concerns raised by market participants regarding temporary liquidity issues and operational inefficiencies arising from cash market fund obligations being settled on a gross basis at the scheme level. The proposal comes after Sebi permitted net settlement for Foreign Portfolio Investors (FPIs) in cash markets.
Sebi's consultation paper outlines that net settlement for outright buy or sell transactions in the cash market at the individual mutual fund scheme level is proposed. Scheme-wise accounting, valuation, daily NAV computation, segregation of securities and funds, and unit-holder interests must remain unaffected by this framework.
In instances where the value of outright sale transactions is less than the value of outright purchase transactions, the residual amount from purchase obligations arising from non-outright transactions will be funded by the mutual fund scheme. However, if the value of outright sale transactions exceeds that of outright purchase transactions, the excess amount will not be adjusted against purchase obligations from non-outright transactions.
The Asset Management Company (AMC) and custodian must ensure that the proposed framework does not impact scheme-wise accounting, valuation, NAV computation, or unit-holder interests. AMFI is tasked with formulating implementation standards in consultation with relevant stakeholders, including custodians, recognized clearing corporations, recognized stock exchanges, and others. Sebi is inviting public comments on the proposals until September 24.
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