Sebi exempts fund managers from placing orders for passive trades

A fund manager can now authorise an AMC employee to place an order on his behalf provided the order instructions are through the electronic mode, including email, and audit trail is maintained

The Securities and Exchange Board of India’s (Sebi’s) has exempted fund managers from placing orders for passive and arbitrage trades, in a partial relaxation to its diktat on trade allocation and execution that becomes applicable on January 1.

According to the regulator’s September circular, AMCs needed to use an automated Order Management System, by which orders on equity and equity-related instruments of each scheme are placed by the fund manager(s) of the respective schemes. Sebi has now said a fund manager may authorise an employee of the AMC for order placement on his behalf provided the order instructions are through the electronic mode, including email, and an audit trail is maintained.

Further, the regulator has said that the orders in case of arbitrage transactions, stock lending and borrowing transactions, passive schemes such as index funds and ETFs and schemes investing primarily based on pre-defined rules and models --  where the discretion of the fund manager is not required for placement of order --- is not mandated to be placed through the OMS.

The AMCs, however, have to demonstrate that no judgement and discretion of the fund manager is required for placement of such orders and ensure the orders are not in breach of existing regulatory and allocation limits. A scheme-wise audit trail of placement of orders, order execution and trade allocation shall be maintained along with time stamping of each stage of the process.

 

“This is an important relaxation as it allows another employee to place the order on behalf of the fund manager, who may be travelling or attending to other matters during market hours,” said a senior fund official.

The Association of Mutual Funds in India had written to the regulator a few weeks back requesting the regulator to exempt trades of passive and arbitrage schemes from the requirement to use OMS and place orders through fund managers for all equity schemes and equity-related instruments. This is because unlike active schemes it’s the dealers who punch in the orders for these transactions without explicit instructions from fund managers.

Sebi has also extended the date for the uniform applicability of NAV in respect of purchase of units of mutual fund schemes upon realization of funds to February 1 from January 1, 2021.

The regulator, however, hasn’t addressed the two main issues that Amfi had highlighted in its communique. All communication by dealers as well as fund managers during market hours will now have to be only through recorded modes and channels. This may require fund houses to record fund managers’ cell phone conversations as well as their offline interactions with business partners, brokers, distributors, analysts, and company officials. Since such interactions are typically confidential, they may now have to be done after market hours.

Fund managers also have to record in writing decisions to buy or sell securities with detailed justifications for the same.