SEBI mulls net settlement of cash market obligations for MFs

Markets regulator SEBI on Thursday proposed permitting net settlement of funds for transactions undertaken by mutual fund schemes in the cash market, while continuing settlement of securities on a gross basis, aiming to reduce temporary liquidity requirements.

“The proposal is intended to facilitate ease of doing business, improve settlement efficiency and reduce temporary liquidity requirements for mutual fund schemes, while ensuring that existing safeguards relating to delivery-based settlement, scheme-wise accounting, valuation and investor protection remain unaffected,” SEBI said in its consultation paper.

The proposal comes after SEBI received representations from market participants highlighting that mutual fund schemes may face temporary liquidity requirements and operational inefficiencies because fund obligations in the cash market are effectively met on a gross basis at the scheme level.

These issues may become more pronounced during index rebalancing, which requires portfolio changes in passive funds and large investor subscriptions or redemptions.

This follows SEBI allowing the net settlement of funds framework for Foreign Portfolio Investors (FPIs).

In its consultation paper, SEBI has “proposed to permit net settlement of funds for outright buy or sell transactions undertaken by a mutual fund scheme in the cash market executed on a recognised stock exchange”.