Sebi’s new ETF rules apply today: What changes from September 7 and how they impact investors?
Sebi’s revised ETF trading rules have come into effect from September 7, changing how price bands and reference prices are determined. The new framework introduces dynamic price bands based on underlying assets and a pre-open auction for gold and silver ETFs, aiming to improve price discovery and reduce premiums or discounts to NAV.
Starting today, September 7, investors in exchange-traded funds (ETFs) may experience fewer situations where ETF prices diverge significantly from their underlying value, especially during periods of high market movement. The Securities and Exchange Board of India (Sebi) introduced new trading rules on September 7 that adjust how ETF price bands are established and bring reference prices closer to actual market levels, with adjustments specific to various asset classes.
These changes are particularly impactful for gold and silver ETFs, which now feature a pre-open auction and greater flexibility for price bands to widen when the global prices of these metals fluctuate overnight.
A pivotal modification involves how exchanges calculate the base price for applying price bands. Previously, exchanges used the ETF’s Net Asset Value (NAV) from two trading days prior, or T-2, to determine this base price. Sebi has now replaced this outdated method with a more current reference price, such as the previous day’s closing NAV or other real-time valuation measures that are category-specific.
This adjustment eliminates the one-day delay that previously caused discrepancies between ETF prices and the value of their underlying assets.
Moreover, Sebi has abandoned the previous system of fixed price bands, which set a standard 20% band for most ETFs regardless of the underlying asset’s volatility. The new framework allows for dynamic price bands that adjust according to the asset class being tracked. Equity and debt ETFs, for instance, will initially trade within a 10% band, which can expand in increments up to 20%, with a mandatory 15-minute cooling-off period if the 20% limit is approached.
Gold and silver ETFs, on the other hand, start with a tighter 6% band but can expand in 3% increments without a predetermined upper cap, reflecting the more volatile nature of these commodities. Overnight and liquid ETFs will retain a fixed 5% band, maintaining stability for assets that typically experience minimal price fluctuation.
Perhaps the most noteworthy change pertains to gold and silver ETFs, which will initiate each trading day with a pre-open auction, akin to the stock market opening process. In this auction, buy and sell orders are collected prior to market opening and matched at a single equilibrium price, ensuring the opening price reflects the balance of demand and supply rather than being dictated by the first trades of the day.
This innovative approach aims to enhance ETF price discovery, making it more responsive to overnight changes in global markets and ultimately bringing ETF prices into closer alignment with the value of their underlying assets.
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