Sebi allows Liquid Index ETFs trading in short selling market

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Market regulator Sebi has allowed exchange traded funds (ETFs) that track indices to trade in the short selling market, as part of changes in the securities lending and borrowing framework.

Securities and Exchange Board of India (Sebi) today said that "Liquid Index ETFs shall be eligible for trading in the Securities Lending and Borrowing (SLB) segment".

In its circular, Sebi said that an Index ETF would be considered 'liquid', if it has traded on at least 80% of the days over the past six months. Another criteria is that the particular Liquid Index ETF's impact cost over the past six months is less than or equal to 1%.

"Positions limits for SLB in respect of ETFs shall be based on the assets under management of the respective ETF," it added.

Further, the regulator has introduced roll-over facility for lenders and borrowers in the SLB segment -- that pertains to short selling in the market.

Generally, short selling refers to selling of a stock that is not owned by the seller at the trading time. It can be done by retail and institutional investors.

According to Sebi circular, any lender or borrower who wants to extend an existing lent or borrow position shall be permitted to roll-over such positions.

With the latest move, a lender who is due to receive securities in the pay out of an SLB session can extend the period of lending. Similarly, a borrower can extend the period of borrowing.

"The roll-over shall be conducted as part of the SLB session," the circular noted.

However, Sebi has said that rollover would not be permitted for netting of counter positions -- netting between the borrowed and lent positions of a client.

"Rollover shall be available for a period of three months i.e. The original contract plus two rollover contracts," it added.

Sebi has asked stock exchanges to take necessary steps for implementing the circular.