SEBI Boosts Efficiency: Mutual Funds to Net Cash Market Settlements from 2027
SEBI introduces a new framework for mutual funds to net cash market fund settlements starting April 2027 to boost operational efficiency.
In a significant move to streamline financial operations, the Securities and Exchange Board of India (SEBI) has announced that mutual fund schemes will be permitted to net their fund obligations for outright purchase and sale transactions in the cash market. This new framework, set to take effect from April 1, 2027, is designed to reduce the need for temporary funding and enhance the overall efficiency of the settlement process.
What is Fund Netting and How Will it Work?
Under the new guidelines issued in a circular on Thursday, mutual funds can now adjust eligible purchase and sale obligations against one another within the same settlement cycle. This means instead of settling every single transaction individually, funds can offset what they owe against what they are owed, focusing only on the net difference.
However, SEBI has laid down strict parameters for this facility:
- Scheme-Level Application: Netting will only be available at the level of individual mutual fund schemes. It is strictly prohibited to adjust obligations or funding across different schemes managed by the same mutual fund house.
- Outright Transactions Only: The facility applies only to "outright transactions," which SEBI defines as either a purchase or a sale of a security—but not both—within the same settlement cycle.
- Exclusion of Non-Outright Trades: If a scheme both buys and sells the same security within a single settlement cycle, those transactions are classified as non-outright and must be settled on a gross basis.
Handling Residual Obligations and Excess Funds
The regulator has clarified how the financial balance will be managed under this system. If the total value of outright sale transactions is less than the outright purchases, the mutual fund scheme must provide the necessary funding to cover the residual obligation.
Conversely, if the proceeds from outright sales exceed the purchase obligations, the excess cannot be used to offset non-outright purchase obligations. Those specific transactions will continue to be funded separately on a gross basis.
What Remains Unchanged?
Despite the shift in fund settlement, SEBI emphasized that the core nature of institutional trades remains intact. The delivery-backed nature of these trades will not change, and the settlement of securities will continue to occur on a gross basis.
Furthermore, the following will remain unaffected:
- Taxes: Securities Transaction Tax (STT) and stamp duty will still be applicable on a delivery basis.
- Excluded Instruments: The netting framework will not apply to derivatives, short-sale transactions, or securities lending and borrowing.
Implementation and Oversight
To ensure a smooth transition, Asset Management Companies (AMCs) and custodians are tasked with building robust systems to distinguish between eligible and excluded transactions. They must also maintain a detailed audit trail of both gross and net fund obligations.
Trustees will play a critical role in reviewing the implementation to ensure the arrangement serves the best interests of the unit-holders. Additionally, the Association of Mutual Funds in India (AMFI) will work alongside clearing corporations, custodians, and exchanges to develop the necessary implementation standards.