New rules governing the trading of exchange-traded funds (ETFs) came into effect on Monday, with the Securities and Exchange Board of India (SEBI) changing the way ETF price bands are determined and introducing a pre-open call auction for gold and silver ETFs.
The changes are aimed at making ETF prices better reflect movements in their underlying assets and improving price discovery on stock exchanges.
SEBI had announced the new framework in June. The implementation, initially scheduled for September 1, was extended to September 7 following feedback from stock exchanges to ensure smooth implementation. All other provisions of the June circular remain unchanged.
What was the problem?
Until now, ETFs based on equity, debt and commodities generally had a fixed price band of 20% on either side, with the base price linked to the ETF’s T-2 day NAV. Overnight ETFs had a 5% band.
SEBI said the one-day lag in the base price and the fixed price band could result in the permitted trading range not properly reflecting movements in the underlying asset.
New base price for ETFs
Under the new framework, the base price used for determining the price band will initially be based on the ETF’s T-1 day closing price, calculated using the last 30 minutes’ volume-weighted average price (VWAP).
If there is no trading during the last 30 minutes of T-1 day, the last traded price of the day will be used. If there is no trade on T-1 day, the latest available closing NAV will be used.
The base price will also be adjusted for corporate actions, where applicable.
Gold and silver ETFs get new price bands
For commodity ETFs, including gold and silver ETFs, SEBI has introduced a dynamic price band.
The initial band will be 6% on either side of the base price. If the ETF reaches the prescribed threshold, the band can be widened by 3% after a cooling-off period.
In cases where international commodity prices move sharply, the price band can be relaxed further in stages of 3%. SEBI has also said there will be no upper or lower cap on the price bands and no restriction on how many times the bands can be flexed during a trading session in exceptional circumstances.
For investors, this means gold and silver ETFs may have a wider permitted trading range on days when international bullion markets see sharp movements.
Pre-open auction for gold and silver ETFs
One of the key changes for investors is the introduction of a call auction in the pre-open session for commodity ETFs, including gold and silver ETFs.
SEBI said the underlying commodities trade continuously across international markets, while ETFs trade only during domestic stock-market hours. The pre-open auction is intended to help discover an equilibrium price before regular trading begins.
This could be particularly relevant for investors tracking global gold and silver prices, as overnight moves in international markets can now be reflected through a formal price-discovery mechanism when domestic ETF trading starts.
Equity and debt ETFs also see changes
For equity ETFs and debt ETFs, other than overnight and liquid ETFs, the initial price band will be 10% on either side.
The band can be widened up to 20% after a cooling-off period. The band can be increased by 5% of the base price, with a maximum of two such flexes in one direction.
Overnight and liquid ETFs will continue to have a fixed price band of 5% on either side.
What does this mean for investors?
The new rules do not change how an investor buys or sells an ETF through a stock exchange. However, they can affect the way an ETF’s market price moves during volatile sessions.
For gold and silver ETF investors, the biggest changes are the new T-1-based reference price, the dynamic 6% initial price band and the pre-open call auction.
Investors should also remember that an ETF’s exchange price can differ from its NAV because it is traded in the secondary market. The new framework is aimed at improving price discovery rather than guaranteeing that an ETF will always trade exactly at its NAV.
SEBI’s June circular also retains the existing close-out provisions for ETFs other than overnight and liquid ETFs.
What investors should watch
Investors in gold and silver ETFs should pay closer attention to overnight international bullion prices, the opening auction and the ETF’s market price versus its NAV, particularly during periods of sharp global price movements.
The new framework is therefore more about how ETFs trade than about changing the underlying investment exposure of the funds.