15 hrs ago
SEBI Reportedly Eases Arbitrage Fund Rules to Support Closing Auction
India’s market regulator has reportedly made a small rule change for arbitrage mutual funds.
These funds try to earn money from price differences between shares and futures.
They usually have to protect themselves by keeping both positions fully matched.
The closing auction has not attracted enough trading activity since it began on 3 August.
The new rule may let a fund briefly leave up to 1% of its plan unmatched.
This could make it easier for funds to participate in the auction.
Some large investors have stayed away because low trading volumes can cause bigger price movements.
SEBI is also considering wider changes to how the closing auction works.
SEBI has reportedly allowed arbitrage mutual funds to carry temporarily unhedged positions of up to 1% of a plan.
The measure seeks to attract liquidity to the closing auction session, which has struggled since launching on 3 August.
Arbitrage funds held about ₹3 lakh crore ($31 billion) in combined assets at the end of August.
Funds previously faced difficulty participating because they were required to remain fully hedged while buying shares and selling futures.
SEBI has also proposed broader changes to the auction framework amid concerns about thin trading and sharp price swings.
- Who
- The Securities and Exchange Board of India (SEBI), arbitrage mutual funds, asset-management companies, and institutional investors.
- What
- SEBI has reportedly permitted arbitrage funds to temporarily carry unhedged positions of up to 1% of a plan.
- Where
- In India’s stock-market closing auction session.
- When
- The relaxation was communicated to asset-management companies earlier this month; the auction launched on 3 August.
- Why
- To encourage arbitrage funds to provide liquidity and address thin volumes, price swings, and difficulty establishing stable end-of-day prices.
Supporters of More Flexibility
Concerns About Auction Liquidity
Relaxing hedging requirements
Supporters of More Flexibility
Allowing a temporary mismatch of up to 1% could help arbitrage funds participate in the auction and bring in liquidity.
Concerns About Auction Liquidity
Institutional investors have largely stayed away because thin volumes can intensify price moves and make stable end-of-day pricing more difficult.
Closing auction design
Supporters of More Flexibility
SEBI’s reported relaxation and proposed framework changes are intended to address weaknesses that emerged after the auction began.
Concerns About Auction Liquidity
Concerns about sharp price swings have led SEBI to consider broader changes, including a possible return to the previous derivatives-expiry settlement method.
Key facts
- Reported allowance
- Temporary unhedged positions of up to 1% of a fund plan
- Fund assets
- Arbitrage mutual funds held about ₹3 lakh crore ($31 billion) at the end of August
- Auction launch
- The closing auction session began on 3 August
- Previous requirement
- Arbitrage funds were required to remain fully hedged
- Main concern
- Thin auction liquidity has contributed to sharper price moves and difficulty setting stable closing prices
- Additional proposal
- SEBI has proposed broader changes, including a possible return to the previous derivatives-expiry settlement method
- Investor communication
- Funds using the allowance may need to inform their unit holders
Sources
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