SEBI Proposes New ETF Trading Rules With Dynamic Price Bands

A set of revisions has been proposed by the Securities and Exchange Board of India (SEBI) for trading in exchange-traded funds (ETFs). These include dynamic price bands of up to 20% and a new mechanism for determining base prices.

The move aims to improve price discovery and reduce the gap between ETF market prices and the value of their underlying assets.

Why Is SEBI Changing The ETF Trading Framework?

SEBI observed that the system currently in use to calculate net asset value (NAV), which uses the NAV of the previous day with fixed price bands, often fails to capture market movements accurately.

Under the proposal released on Monday, the Securities and Exchange Board of India (SEBI) said the base price used to calculate ETF trading limits would be derived from the volume-weighted average price (VWAP) during the last 30 minutes of the previous trading session.

If an ETF does not trade during the final 30 minutes of a session, the base price would shift to its last traded price from that day. In cases where there is no trading activity throughout the session, the latest available NAV would be used instead.

SEBI has also proposed dynamic price bands for equity and debt ETFs. Initially, ETFs would trade within a band of plus or minus 10%. After a cooling-off period, those limits could widen to plus or minus 20%, allowing prices to adjust more closely to movements in the underlying assets.

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What Changes Are Planned For Gold And Silver ETFs?

For gold and silver ETFs, which track commodities that trade continuously in international markets, SEBI has proposed introducing a pre-open call auction mechanism. The idea is to help establish an equilibrium price before regular trading begins.

The proposals build on a consultation paper issued in February, when the regulator had floated broader changes to ETF pricing and trading norms. SEBI has now refined those suggestions to address operational challenges and improve market efficiency.

Sources:

The Economics Times

Moneycontrol