SEBI Proposes Net Settlement of Funds for Mutual Fund Cash-Market Trades
Key Takeaways
- •SEBI has proposed allowing mutual fund schemes to net-settle funds for cash-market trades while securities continue to settle on a gross basis.
- •Netting funds would offset amounts owed against amounts receivable, reducing the liquidity mutual fund schemes need to complete trades.
- •The proposal responds to the substantial growth in assets managed by SEBI-registered mutual funds, making operational efficiency in large-volume cash-market trades more important.
- •Implementation would involve India's market infrastructure institutions, including clearing corporations that handle cash-market settlement.
- •The proposal is expected to undergo public consultation with market participants before final regulations and an implementation timeline are issued.
India's securities regulator, the Securities and Exchange Board of India (SEBI), has proposed a new framework that would allow mutual fund schemes to net-settle their funds for transactions in the cash market, while securities themselves would continue to be settled on a gross basis.
The proposal is aimed at easing temporary liquidity requirements that mutual funds currently face when executing cash-market trades, and at improving the overall efficiency of the settlement process. India's mutual fund industry has grown substantially in recent years, with assets under management managed by SEBI-registered mutual funds expanding significantly, making the operational efficiency of large-volume cash-market trades an increasingly relevant consideration for the industry.
Under the existing system, mutual fund schemes must settle each transaction individually on a gross basis, which can create short-term liquidity pressure when funds are buying and selling securities. By permitting the netting of funds — that is, offsetting amounts owed against amounts receivable before settlement — SEBI's proposal would reduce the amount of money a scheme needs to have available at any given time to complete its trades.
Net settlement of funds is a mechanism widely used in securities markets to lower liquidity demands and operational costs, as only the net amount due after offsetting buy-side and sell-side obligations is transferred. Implementation of such a framework would involve India's market infrastructure institutions, including clearing corporations, which handle the settlement of cash-market trades.
SEBI proposals of this nature are typically issued for public consultation, allowing market participants — including asset management companies, stock exchanges, and clearing corporations — to submit comments before final regulations are framed. Market participants and observers would be watching for the final circular and its implementation timeline following the consultation process.
The proposal was published by CNBC-TV18 Markets, and further details are available in the original report: SEBI proposes net settlement of funds for mutual fund cash-market trades.
