SEBI Proposes Extended Cut-Off Timings For Overnight Mutual Fund Redemptions

Securities and Exchange Board of India, SEBI, has published a draft circular for extending redemption cut-off times for overnight mutual fund schemes to 7:00 PM. The SEBI invited public feedback on the proposal. The feedback can be sent till February 10, 2025, post which the policy will be finalised. SEBI has proposed that the cut-off time should be 7:00 PM to offer flexibility to brokers and clearing members, so the MFOS units can be returned and the redemption requests started after market hours, reducing same-day deployment pressures without sacrificing the client’s investment safety.

The draft circular further observes that the change in timings will not impact the valuation and redemption capacities of overnight schemes. This is because these funds operate on a different settlement cycle of T+1, which by definition matures the next working day. In case of redemption, it would be possible for the fund to avoid reinvestment of matured amounts, thus ensuring a smooth payout without dislodging market liquidity.

Earlier in December 2023, the SEBI issued a circular which ordered stock brokers (SBs) and clearing members (CMs) to upstream the client credit balances in the books of the SBs and CMs to be transferred to the clearing corporations at the end of the trading day.

The SEBI said that the balances are allowed to be transferred in the form of cash, fixed deposit receipts, or units of mutual fund overnight schemes (MFOS).

The SEBI said that Mutual Fund Overnight Schemes are a new avenue which has been made available to SBs and CMs to deploy client funds. The introduction of MFOS is aimed at ensuring minimal risk transformation of client funds (which are withdrawable on demand) available with SBs/ CMs because of overnight tenure and exposure to only risk-free government securities.

The SEBI also said that SBs and CMs should ensure that the client funds are invested only in such MFOS that deploy the money into risk-free government bond overnight repo markets and overnight Tri-party Repo Dealing and Settlement (TREPS). Additionally, the SEBI mandated that MFOS units are required to be in dematerialised (demat) form, and must necessarily be pledged with a Clearing Corporation at all times.

Operational Challenges Addressed

It is challenging for brokers to deal with the present cut-off time at 3:00 PM since they are busy reconciling accounts and redressing fund redemption at that time. Through the extension of the cut-off timing the SEBI aims to realign the working timeline of the mutual fund house as per the convenience of brokers.

The market regulator also said that the change will be operationalised by a working group consisting of experts from the industry, AMFI, and the Mutual Funds Advisory Committee (MFAC) and thus be a step toward operational efficiency in Indian financial markets.

Public Comments 

SEBI has sought public comments on the draft circular till 10 February 2025. Interested parties can submit their comments either through e-mail or online to the officials at SEBI. The Circular states that the particular changes in the cut-off timings and the working details of the proposal are available on the website of SEBI. The circular also stated that the new cut-off timing will come into effect from March 2025.

The proposed amendment underscores the commitment of SEBI towards striking a balance between investor safety and market efficiency. Reduction in operational constraints across brokers on one hand and aligning redemption timings with an effective process of settlement of funds is also likely to make the investment ecosystem smoother.