New ETF rules from today: How they affect investors
What's the story
The Securities and Exchange Board of India (SEBI) has implemented new trading rules for exchange-traded funds (ETFs), effective today. The revised framework aims to bring ETF prices closer to their underlying asset values, particularly during volatile market conditions. It does this by introducing dynamic price bands based on underlying assets and a pre-market open auction for gold and silver ETFs.
Rule changes
Reference price changes
The new rules replace the existing practice of using the ETF's Net Asset Value (NAV) from two trading days ago, or T-2, to determine the base price for price bands.
Now, exchanges will use a more recent reference price like yesterday's closing NAV or real-time valuation measures depending on the ETF category.
This change eliminates a one-day lag that could cause discrepancies between ETF prices and their underlying asset values.
Price band flexibility
Dynamic price bands
The new rules also replace the earlier system of fixed price bands.
Previously, most ETFs were subject to a price band of up to 20%, irrespective of the volatility of the underlying asset.
Now, under this revised framework, price bands will be dynamic and vary depending on the type of asset tracked by the ETF.
This is expected to allow ETF prices to respond more efficiently to market movements while avoiding unnecessary trading restrictions.
Auction system
Pre-open call auction for gold, silver ETFs
Gold and silver ETFs will now start each trading day with a pre-open call auction, similar to stocks.
In this process, buy and sell orders are collected before the market opens and matched at a single equilibrium price.
This means that the opening price is determined by supply-demand dynamics rather than the first stray order of the day.
Investor impact
Impact on market
The changes are expected to bring ETF prices closer to their underlying asset values, reducing large premiums or discounts to NAV.
They could also improve liquidity and price discovery, especially during volatile market conditions.
Overall, these new trading rules mark a significant shift in how ETFs are traded and priced on exchanges in India.