Sebi's new SOPs beneficial for investors

Sebi’s new Standard Operating Procedure (SOP) that entails financial penalties on Market Infrastructure Institutions (MIIs) such as the exchanges, clearing corporations etc. for business disruptions beyond a pre-defined time is a bold, but the good move would play a significant role in ensuring smooth functioning and ease investor confidence in the securities market.

We have in the past seen a few glitches such as the one on February 24th this year which affected trading at the National Stock Exchange (NSE) for almost four hours. Such events can have a crushing effect on investor confidence in market infrastructure and if not proactively addressed can lead to investors exiting markets altogether.

Technology playing a critical role

With technology now playing a critical role in the operations and functioning of MIIs, the onus has been placed on them to ensure system efficiency and business continuity planning. The new SOP, has clearly defined norms for identification of disruption and disaster declaration. It has also mandated the need for analysis and detailed reporting of the root cause of the failure including duration of the glitch, business systems and processes that were impacted along with chronology of events and actions taken to address it in a time-bound manner to the regulator.

Putting in place a slew of financial disincentives such as Rs.2 lakh per working day for failing to address the glitch, to harsher penalties such as the exchange having to pay 10 percent of its average standalone net profit for the previous two financial years and penalizing the Managing Director and Chief Technology Officer 10 percent of their annual pay based on the severity of the glitch, is an effort to ascribe clear ownership and responsibility when such incidents happen.

All these penalties will be automatically triggered and credited to the Investor Protection Fund/Core Settlement Guarantee Fund maintained by the MII. Stringent SOPs on reporting of disruptions to the regulator and financial consequences for failing to do so, also emphasizes the more proactive role Sebi is taking towards making MIIs more accountable to investors.

Transparency and accountability

To conclude, I would like to state that the new SOPs are a step in the right direction. In a business where downtime is completely unacceptable, it should serve as a cue to MIIs to invest in upgrading their systems and monitor them on a regular basis to ensure their efficiency and performance. I believe the SOPs will serve as a catalyst in making critical infrastructure more robust while ushering in greater transparency and accountability that will in the long run give a fillip to the credibility of the securities market.