The Securities and Exchange Board of India (SEBI), on Wednesday, revised norms for computing margins applicable for exchange traded funds (ETFs), which track broader stock indices.

Index ETFs are generally a basket of securities that track a particular index.

To bring in more efficiency on calculating margins of index ETFs, SEBI, in a circular, said it had changed the method of computation.

For computing margins on ETFs, they are treated on a par with stocks, and margins that are applicable on stocks are applied.

“In order to bring efficiency in margining of index ETFs, it has been decided that VaR (Value at Risk) margin computation for ETFs that track an index shall be computed as higher of 5 per cent or three times sigma of the ETF,” the circular said.

Generally, VaR helps understand the risks related to an investment portfolio.

According to SEBI, the revised margin framework would be only for ETFs that track broad-based market indices and does not include ETFs related to sectoral indices. Further, to facilitate efficient use of margin capital by market participants, the regulator would extend the cross-margining facility to ETFs based on equity index and its constituent stocks for offsetting certain positions in cash market segment segments.

The facility would be for ETFs and constituent stocks, ETFs and constituent stocks futures besides ETFs and relevant Index Futures. In all the three cases, it would be applicable to the extent of offsetting the positions of each other. In the event of a suspension on creation/redemption of the ETF units, the cross-margining benefit would be withdrawn, the circular noted.

SEBI has asked all stock exchanges to take necessary steps for implementing the revised framework.

Notifies reforms

Meanwhile, SEBI, notified the wide-ranging reforms for the mutual fund sector, which would provide incentives to fund houses for expanding to small cities but might result in additional costs for investors.

The changes, which would come into effect from next month, would require fund houses to make half-yearly financial results within one month of the end of every six-month period, SEBI said in a notification.

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