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    RBI proposes draft directions for Electronic Trading Platforms

    The RBI has issued draft directions for a regulatory framework for ‘Electronic Trading Platforms’ (ETP). The new proposed regulation is an update to the 2018 framework. It was brought on by increased integration of the Indian forex market with international markets, developments in the technology landscape and an increase in product diversity. The RBI had previously noted an increasing demand for access to offshore ETPs that offered permitted Indian Rupee (INR) Products.

     According to the RBI an ‘Electronic Trading Platform (ETP)’ refers to “any electronic system, other than a recognised stock exchange” on which transactions take place for instruments such as securities, money market instruments, foreign exchange instruments, derivatives, etc. In order to be recognized as an ETP by the RBI, operators of these platforms are required to obtain prior authorization for their platforms and their instruments from the RBI, within three months from the date of issue of these directions.

    To be authorised as an ETP, an organization must be incorporated in India and have experience of at least three years in operating trading infrastructure in financial markets. It must also have and maintain a minimum net worth of Rs.5 crore. An ETP must also “obtain and maintain robust technology infrastructure with a high degree of reliability, availability, scalability and security in respect of its systems, data and network, appropriate to support its operations and manage the associated risks” and have the capability to disseminate trade information on a “real-time basis or near real-time basis.” Additionally, the RBI has stated that foreign shareholders of an authorized ETP in India, are required to conform to all applicable laws and regulations in India, including the Foreign Exchange Management Act, 1999.

    The directions issued by the RBI set out the various obligations ETPs are required to comply with, ranging from the operation of their systems to storing of data. Special directions are also set out for foreign or offshore ETPs.

    Requirements as an authorized ETP

    1) Operating Framework

    Access and participation: ETP operators are required to be objective, fair and transparent with membership criteria and conduct due diligence while on-boarding members. Members must be identified uniquely using Legal Entity Identifier (LEI) and/or Permanent Account Number (PAN). Pre-trade information such as bid/offer prices, related quantities, depth of trading interest, etc and post-trade information such as the price, volume and time of transactions , etc. must be a made available to members in a fair manner. Further, they should be made aware of all the necessary rules and regulations mandated by the RBI

    Risk Management : The RBI also calls for ETPs to have a comprehensive risk management framework covering all aspects of its operations and ensure all trades on the system are dealt in a fair manner. To ensure integrity of trading systems, ETP operators must ensure access control for its members and segregate the ETP from other financial services to prevent unauthorized access to its services. They are also required to prevent transactions that are not in compliance with the conditions of authorization. As for algorithmic systems, operators must put in place a framework for testing and on-boarding the system and have adequate monitoring for managing risks that may arise from the algorithm. ETPs must also introduce appropriate controls to reduce the likelihood of erroneous transactions such as off-market quotes or trades, fat finger errors, unintended or uncontrolled trading activity by members, etc. Similarly, exigencies like suspension/cessation of trading or cancellation of orders/trades, malfunctions in its systems or erroneous use by members, or any other unforeseen situation must be dealt with in accordance with clearly laid down rules and regulations.

    2)Surveillance & Transparency:

    In order to maintain market integrity, operators are required to ensure fair and orderly trading by monitoring a real time and post facto basis. Similarly, in order they must maintain transparency by identifying and disclosing any conflict of interest and having a transparent fee structure for its members.

    3)Outsourcing of operations:

     Often operators will outsource their operations to external entities, the RBI states that the operator must ensure that these entities comply with the necessary regulations. They must also ensure that the third-party entity does not hinder the operator’s  compliance. External entities must maintain the necessary effective governance and risk management mechanism. Further, they must follow the requirements data  even after their arrangement with the ETP operator has ended.

     4)Preservation, access and use of data:

    All data collected by ETPs must be strictly controlled by the ETP operator maintained in easily retrievable media for at least 10 years. An ETP operator must maintain confidentiality and security of all ETP data. Further the RBI states, “data sought for any investigation by the Reserve Bank or any other authority as required under Indian laws or regulations shall be maintained for three years from the date of completion of the investigation.”

    5)Technology and Information security (IS):

    In order to adequately recover from disaster, an ETP must have a  suitable Business Continuity Plan (BCP). Operators must also conduct IT/IS audit, at least once a year, by auditors empanelled by Indian Computer Emergency Response Team (CERT-In). Further, they must have a  robust information/cyber security process and adequate information and data security infrastructure. These should adhere to information/cyber security guidelines. The Reserve Bank of India may also, at its discretion, order an IT/IS audit of the ETP.

     6)Reporting requirements:

    An ETP is required to provide a quarterly report on its functioning of the platform 15th day of the month and a yearly report on 15th of April. It must also report all transaction information to any trade repository or reporting platform and data/information to any other agencies/authorities. Further, it must promptly inform the RBI of any event resulting in disruption of activities or market abuse

    7)Termination of operation:

     An ETP can terminate its operation with prior approval of the Reserve Bank. If it wishes to end termination of its operations early it can surrender its letter of authorization  to the Reserve Bank of India.

    Requirements for offshore ETPs

     The RBI has now allowed for offshore ETPs that wish to allow transactions involving rupee or rupee interest rate to be authorized in India. They must follow the same due process as Indian ETPs. The RBI also set out eligibility criteria and directions for these ETPs.

    To be authorized by the RBI an ETP :

    • must be incorporated in a country which is a member of the ‘Financial Action Task Force’ and be regulated by the financial market regulator of the country
    • the financial market regulator must be a member of the ‘Committee on Payments and Market Infrastructures’ or the ‘International Organization of Securities Commissions’
    •  must only permit transaction in “eligible derivative instruments” between residents and non-residents. These must involve rupee and/or rupee interest rates that the Reserve Bank has permitted under the Foreign Exchange Management Act, 1999

    Directions for offshore ETPs

    Just like Indian ETPs, offshore ETPs must report any data and/or information to the Reserve Bank of India and any transaction information to any trade repository or reporting platform in the format and within the timeframe prescribed by the Reserve Bank. It must carry out an IT/IS audit, at least once in a year, by auditors certified to undertake such audits by their respective national authorities. Additionally, it should report any regulatory action taken against it by any regulator to the RBI within a period of one month. It must also not allow transactions between residents.

    The RBI has invited comments on the draft directions from all relevant parties until May 31, 2024.

     


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    The post RBI proposes draft directions for Electronic Trading Platforms appeared first on MediaNama.

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