Sebi exempts fund managers from placing orders for passive trades


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 commerce allocation and execution that becomes relevant on January 1.

According to the regulator’s September circular, AMCs needed to use an automated Order Management System, by which orders on fairness and equity-related instruments of each and every 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 given the order directions 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, inventory lending and borrowing transactions, passive schemes such as index funds and ETFs and schemes making an investment primarily based on pre-defined rules and models — where the discretion of the fund manager isn’t required for placement of order — isn’t mandated to be placed through the OMS.

The AMCs, on the other hand, have to illustrate that no verdict and discretion of the fund manager is required for placement of such orders and make sure the orders don’t seem to be in breach of existing regulatory and allocation limits. A scheme-wise audit trail of placement of orders, order execution and commerce allocation shall be maintained at the side of time stamping of each and every stage of the process.

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“This is crucial relaxation as it allows another employee to place the order on behalf of the fund manager, who could also be travelling or attending to other affairs all over market hours,” said a senior fund official.

The Organization of Mutual Funds in India had written to the regulator a couple of 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 fairness schemes and equity-related instruments. It is because unlike active schemes it’s the dealers who punch in the orders for these transactions without explicit directions 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, on the other hand, hasn’t addressed the two main issues that Amfi had highlighted in its communique. All communication by dealers in addition to fund managers all over market hours will now should be only through recorded modes and channels. This may require fund houses to record fund managers’ cell phone conversations in addition to their offline interactions with trade partners, brokers, distributors, analysts, and company officials. Since such interactions are in most cases confidential, they may now should be done after market hours.

Fund managers also have to record in writing decisions to shop for or sell securities with detailed justifications for a similar.

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