Sebi Proposes Stricter Price Controls for Gold and Silver ETFs
In response to the unprecedented volatility witnessed in gold and silver prices over recent weeks, the Securities and Exchange Board of India (Sebi) has initiated a comprehensive review of price bands and circuit filters for exchange traded funds (ETFs) focused on these precious metals. The markets regulator has put forth a detailed consultation paper aimed at introducing more robust safeguards to protect investors and maintain market stability.
New Price Band Framework for Precious Metals ETFs
Sebi has proposed implementing a +/-20% price band specifically for gold and silver ETFs. This measure is designed to curb excessive price swings that have characterized these markets lately. The regulator emphasized that part of this price band could be dynamically adjusted based on the volatility observed in international markets for these metals, ensuring a more responsive and globally aligned regulatory approach.
According to the seven-page consultation paper released on Friday, the proposed system includes an initial price band of +/-6% for gold and silver ETFs. This initial limit can be flexed up to the maximum +/-20% during the trading day, but only after adhering to a mandatory cooling-off period. The mechanism is structured to prevent abrupt market movements while allowing for necessary adjustments.
Detailed Mechanism for Price Band Flexing
The consultation paper outlines a step-by-step process for flexing the price bands. Once the initial +/-6% band is exhausted, a cooling-off period of 15 minutes will be enforced. Following this, the price band will be flexed by an additional 3%. If the price movement in international markets exceeds the aggregate daily price limit (DPL) of 9%, the band may be further relaxed in stages of 3%, each accompanied by a 15-minute cooling-off period. This graded approach ensures that any adjustments are measured and controlled.
Sebi has stipulated that there can be a maximum of two instances of such flexing in a single trading day, with the ultimate cap set at +/-20%. Additionally, one of the key conditions for relaxing the price band is that a minimum of 50 trades must be executed, involving at least 10 unique client codes (UCCs) and three trading members on each side of the trade, specifically at or above the 9.90% threshold. This requirement aims to ensure that any band relaxation is supported by genuine market activity and liquidity.
Extended Proposals for Debt and Equity ETFs
Beyond precious metals, Sebi is also proposing similar price bands for ETFs based on debt and equity indices. The regulator envisions a graded price band system with a comparable +/-20% range, applying the same principles of initial limits, flexing mechanisms, and cooling-off periods. This move indicates Sebi's broader intent to standardize and enhance the regulatory framework across various ETF categories, promoting consistency and investor protection in the rapidly evolving financial markets.
The consultation paper represents a proactive step by Sebi to address the challenges posed by market volatility, particularly in the context of global economic uncertainties affecting commodity prices. By introducing these measures, the regulator aims to foster a more stable and transparent trading environment for ETFs, ultimately benefiting investors and market participants alike.
