Sebi issues operating norms for silver exchange-traded funds

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The Securities and Exchange Board of India (Sebi) on Wednesday issued fresh operating norms for the introduction of silver exchange traded funds (ETFs) in the country, a move that will expand the options available for investing in commodities through exchanges. This comes after the market regulator earlier this month amended mutual funds regulations to have mechanism for silver ETFs. 

In its latest circular, Sebi mandated that a silver ETF scheme by mutual funds have to invest at least 95% of the net assets in silver and silver related instruments.  

This regulation is similar to gold ETFs, where asset management companies have to hold 95% of their assets in gold, gold bullion, and gold-related securities. 

Providing further details, Sebi said that exchange traded commodity derivatives (ETCDs) having silver as the underlying can be considered as silver-related instrument. The regulator, however, laid down some conditions for having investment in ETCDs. 

“The exposure to ETCDs having silver as the underlying shall not exceed 10% of net asset value of the scheme. However, the above limit of 10% shall not be applicable to silver ETFs where the intention is to take delivery of the physical silver and not to roll over its position to next contract cycle,” Sebi said in a note. 

Additionally, before investing in ETCDs having silver as the underlying, mutual funds have been asked to put in place a written policy with regard to such investment with due approval from the Board of the AMC and the Trustees. The policy will have to be reviewed by the board of AMC and trustees at least once a year. 

Hemen Bhatia, deputy head-ETF, Nippon Life India Asset Management Ltd, said, “With Sebi laying regulations for silver ETFs, it will become very convenient for investors to have exposure to silver as a commodity in a transparent manner, in addition to their exposure to gold.” 

Investors should note that just like in gold ETFs, mutual funds will have to buy silver worth the corresponding value of the total investments made in a scheme and store it in vaults or lockers.  

Transportation charges for bringing silver from London, customs duty, taxes and other levies will be added to the silver price. In terms of costs, as per Sebi’s regulations there is an upper limit of 1% total expense ratio on ETFs. 

In the latest circular, Sebi said that the physical silver should be of standard 30 kg bars with fineness of 999 parts per thousand (or 99.9% purity) confirming to London Bullion Market Association (LBMA) Good Delivery Standards. 

The regulator had earlier said that the silver held by an ETF scheme should be valued at the AM fixing price of London Bullion Market Association (LBMA) in US dollars per troy ounce for silver having a fineness of 999.0 parts per thousand. 

Gold prices at LBMA are fixed on a daily basis (business day) at 10:30 am and 3 pm GMT. 

Further, Sebi has mandated that the tracking error, which is the annualised standard deviation of the difference in daily returns between physical silver and the net asset value of Silver ETF based on past one year rolling over data, should not exceed 2%.

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