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SEBI has introduced host of measures to improve liquidity in passive funds – ETFs and index funds.
Among some key measures are compensation to market makers, introduction of campaign on passive funds and putting cap on tracking error.
Let us look at some key measures:
- Fund houses will have to appoint at least two market makers (MMs) who are members of stock exchanges to provide continuous liquidity for ETFs
- These MMs can create fresh units with AMCs in the multiples of creation unit size
- Fund houses will have to facilitate redemption of units of ETFs by MMs on a best effort basis
- Fund houses can pay incentives to MMs within the permissible limit of TER
- MFs can form transparent policy to incentivize their MMs based on their performance in terms of generating liquidity
- MFs can also incentivize MMs through liquidity enhancement schemes (LES)
- MFs will have to publish their compensation policy to MMs on SIDs of ETFs
- AMCs will be allowed to create or redeem units of ETFs without upfront payment of 100% value of units
- Fund houses will have to spend 1bps of their passive fund AUM to spread awareness on passives through a focussed campaign
- Investor investing at least Rs.25 crore can directly deal with AMCs for unit creation of ETFs
- Cut off timing will not be applicable on investors and MMs who deal directly with AMCs
- Swing pricing norms will not be applicable on debt ETFs
- Tracking error ETFs/index funds cannot exceed 2%
- If it exceeds 2%, it should be brought to trustees notice immediately
- Tracking error has to be disclosed on past one year rolling data
- Fund houses will have to disclose annualized difference between tracking index, index funds and ETFs
- In debt ETFs, such a difference cannot exceed 1.25% on annualized basis
- iNAV i.e. real time NAV in equity ETFs has to be disclosed within 15 seconds from underlying market
- Such a limit will be 90 minutes for debt ETFs
- iNAV of gold and silver can be displayed as and when a change happens
- Rebalancing has to be done within 7 calendar days
- ETFs/index funds will have to disclose name and exposure to top 7 issuers and stocks, top 7 groups and top 4 sectors. Any change has to be reported immediately
These changes will come into effect from July 1, 2022.
