Mumbai: The Securities and Exchange Board of India (SEBI) on Thursday proposed allowing mutual fund schemes to net certain cash-market fund obligations, a move aimed at reducing temporary funding requirements and improving settlement efficiency for institutional investors.
Under the proposed framework, a mutual fund scheme would be allowed to offset eligible outright purchases against eligible outright sales within the same settlement cycle. However, the underlying securities would continue to be settled on a gross basis, ensuring that the delivery-backed nature of institutional trades remains unchanged.
SEBI has invited public comments on the proposal by September 24, according to a consultation paper.
The regulator said mutual fund schemes can face temporary liquidity requirements and operational inefficiencies because cash obligations in the cash market are currently settled on a gross basis at the scheme level. Such requirements can become more significant during events such as index rebalancing, when passive funds make large portfolio adjustments, as well as during periods of substantial subscriptions or redemptions.
SEBI said it had already permitted a net settlement of funds framework for foreign portfolio investors and was now proposing a suitably tailored framework for mutual funds, subject to appropriate safeguards.
The proposed mechanism would apply only to outright transactions executed by a mutual fund scheme in the cash market through a recognised stock exchange. Transactions involving only purchases or only sales of a security during a settlement cycle could be considered for determining the scheme’s net fund obligation.
However, where a scheme buys and sells the same security during the same settlement cycle, those transactions would be excluded from netting and would continue to be settled on a gross basis.
The regulator has proposed that netting be permitted only at the individual scheme level. Mutual funds would not be allowed to offset obligations across different schemes managed by the same asset management company or make adjustments between schemes or portfolios.
SEBI said the asset management company, mutual fund and custodian would have to ensure that the proposed mechanism does not affect scheme-level accounting, net asset value calculations, asset allocation requirements, investment limits or the interests of unit holders.
