SEBI, exchanges move toward net settlement to ease ETF price risk
SEBI and exchanges are developing a net settlement mechanism for ETFs to reduce price risk for market makers and lower trading costs.Summary
The Securities and Exchange Board of India (SEBI), along with stock exchanges and clearing corporations, is working to establish a net settlement system for exchange-traded funds (ETFs). Currently, market makers face intraday price risk because they estimate demand and settle at the end-of-day price, leading to wider bid-ask spreads and potential deviations from fair value. A net settlement mechanism would consolidate offsetting buy and sell orders at the clearing level, allowing market makers to settle only the net position, thereby reducing exposure and operational uncertainty. While regulations enabling this already exist, the operational framework is still under development, coordinated by the AMFI ETF committee. Implementation requires system changes at exchanges and clearing corporations to identify and merge positions for settlement, and progress has been gradual, with SEBI encouraging industry consensus. Once operational, this mechanism is expected to improve ETF liquidity and price efficiency by reducing the cost of providing liquidity and minimizing intraday risks.
(Source：The Hindu - Business Line)