Sebi to review ETF pricing framework to curb divergence

Currently, stock exchanges apply a fixed price band of 20% on the base price of ETFs, except a price band of 5% for overnight ETFs investing only in TREPs (Tri-Party Repo Dealing System).

The base price for applicability of price bands for ETFs is taken as T-2 day closing net asset values (NAVs) by exchanges instead of T-1 day closing price, as in the case of index and individual scrips.

“The existing fixed price band of +20% to all ETFs (except overnight ETFs), regardless of their underlying/benchmark, does not appropriately reflect the permissible movement and volatility of the underlying, and, therefore, may lead to situations where the ETF’s trading range is excessively wide relative to the underlying,” Sebi said in a discussion paper.

The closing NAV of ETFs typically differs between T-1 and T-2 closing. Accordingly, the existing practice of using the T-2 Day closing NAV for determining the base price for ETFs results in an inherent lag of one trading day in the base value used for applying price bands, Sebi said.

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Also, corporate actions such as bonuses and dividends effective on T-1 day are being adjusted manually on the T-2 day closing NAV for the determination of the base price. This manual process increases the risk of errors and omissions of certain corporate actions, it said. Further, the existing fixed price band of 20% for ETFs except overnight ETFs may not be commensurate with the maximum permissible price range of the underlying, which is dependent on the T-1 day closing price, Sebi added.

The regulator proposed that the base price on T-day may be either the closing price of ETFs on T-1 day, based on the weighted average traded price of the last 30 minutes or an average iNAV of last 30 minutes on T-1 day or the closing NAV of T-1 day.