The , along with and clearing corporations, is working on developing the operational ecosystem for a net settlement mechanism for , a move that could sharply reduce price risk for market makers and lower the cost of providing liquidity, according to people familiar with the discussions.
While enabling regulations already exist, the practical framework to allow buy and sell orders in ETFs to be netted off at the settlement level is still being put in place. The Association of Mutual Funds in India’s (AMFI) ETF committee is coordinating with exchanges and clearing corporations to iron out operational issues.
Under the current system, market makers often have to take positions based on estimates of demand during the trading day and then settle at the end-of-day price. This exposes them to price movements between the time they provide quotes and when the underlying units are created or redeemed.
“A lot of market makers don’t know how many units they will finally have to deliver,” a source said. “They end up carrying intraday price risk because they are essentially estimating flows.” To compensate, market makers tend to quote wider bid-ask spreads, which raises trading costs for investors and can lead to ETFs trading away from their fair value.
Intra-day risks
This issue is particularly visible during periods of volatility, said market participants, when ETFs can open at a premium or discount to their indicative net asset value (iNAV), despite disclosure and display requirements on exchanges. Under a net settlement mechanism, offsetting buy and sell orders would be consolidated at the clearing level, allowing market makers to settle only the net position rather than gross trades. If implemented smoothly, this could cut intra-day exposure and reduce operational uncertainty.
“From SEBI, the provision is there, but the ecosystem between clearing corporations, exchanges and market makers is missing,” said another source. “If a client is selling and another is buying, those positions can be netted off. That way, there is no price risk for the market maker. It’s in process, and it should reduce the cost of providing liquidity.”
However, the implementation requires system changes at exchanges and clearing corporations, including how client and market maker positions are identified and merged for settlement.
“Operationally, there are challenges that are being solved. All market participants have to come together,” the source said, adding that discussions have been ongoing for some time now.
Slow progress
SEBI, people said, is broadly supportive but is letting industry participants build consensus and execution capability. While timelines remain fluid, the mechanism is expected to improve ETF liquidity and price efficiency once operational, even if progress remains gradual
Emails sent to SEBI and AMFI for comments did not elicit a response.