Reserve Bank of India (RBI) releases directions on The Electronic Trading Platforms 2018
The RBI issued final guidelines to the entities operating electronic trading platforms (ETPs). As per the norms issued by the central bank, ETPs constitute any electronic system, other than a recognised stock exchange, on which transactions will be carried out for eligible instruments. The final direction was published on 5 October 18 based on the public consultation feedback on the draft ETP direction released almost a year back.
Trading on electronic platforms is being encouraged across the world as it enhances pricing transparency, processing efficiency and risk control. It also enables better market surveillance and, therefore, discourages market abuse and unfair trading practices.
Summary of the directions
General guidelines
- Prior authorisation from the RBI is mandatory for any entity to operate an ETP under these directions.
- For already existing or operating ETPs, applications for authorisation have to be made within a period of six months from the date of issue of these directions. Until this authorisation is granted or rejected by the RBI, an existing ETP operator may carry on with its operations.
- Only transactions in instruments approved by the RBI shall be hosted by the authorised ETPs.
Exception
An exception to these directions would be in cases where ETPs are operated by banks for their customers (who are acting as users) on a bilateral basis. This exception would only be applicable when the ETPs do not extend direct or indirect access to market makers in any markets for eligible instruments (including purposes such as foreign exchange transactions, authorised dealers).
Eligibility criteria for authorisation of ETPs
General criteria
- Country of of incorporation of the entity should be India.
- Exisiting entitites, if not incorporated in India, should conform to the requirements of incorporation in India within one year from the date of issue of authorisation by the RBI.
- Shareholding by non-residents shall conform to all applicable laws and regulations, including the Foreign Exchange Management Act, 1999.
- Entities shall have experience of at least three years in operating trading infrastructure in financial markets.
- These criteria will not apply to ETPs operated by Scheduled Commercial Banks.
Financial criteria
- The entity shall have a minimum net worth of 5 crore INR and shall continue to maintain it.
- Exisiting entities operating with a lower net worth shall achieve the minimum requirement within a year from the issue of authorisation from the RBI.
- Banks seeking authorisation to operate an ETP shall keep aside a minimum capital of 5 crore INR for this purpose.
Technological criteria
- Entities shall have the capability to disseminate trade information on a real-time basis or near real-time basis.
- The entity shall obtain and maintain robust technology infrastructure with a high degree of reliability, availability, scalability and security in respect of its systems, data and network.
Title and commencement of the directions
The directions will be called Electronic Trading Platforms (Reserve Bank) Directions, 2018.
They will be issued to the entities operating ETPs to transact trade in eligible instruments.
They shall come into force with effect from 5 October 2018.
Grant of authorisation to operate ETP and cancellation
- Entities may submit the application form for ‘Authorisation to operate an Electronic Trading Platform’ on satisfying the eligibility criteria prescribed under these directions.
- If any clarification or information is required by the RBI, it may call for the same from the applicant and the applicant shall furnish such additional information.
Operating framework
Access and participation
- Objective, fair and transparent membership criteria
- Due diligence at the time of on-boarding
- Member identification using Legal Entity Identifier (LEI) and/or Permanent Account Number (PAN)
- Easy availability of pre-trade, post-trade and such other information in a fair and non-discriminatory basis
- Members should have easy access to documents pertaining to rules and regulations regarding on-boarding, suspension and cessation of membership, roles and responsibilities of members and operator, liability framework for ETP and users in case of breach of rules and regulations, restrictions or other requirements
Risk management
- Implementation of a risk management framework covering all aspects of operations ensuring that risks associated with its operations are identified and managed prudently
Trade integrity
- Ensure access control for its members, prevent unauthorised access to the platform
- Segregate the ETP from other financial services to prevent unfair access to the ETP
- Ensure all trades on the system are dealt with in a fair, non-discretionary and orderly manner
- Prevent transactions that are not in compliance with the conditions of authorisation or with the prevailing legal or regulatory requirements
Algorithmic systems
- Put in place a framework for testing and on-boarding of algorithmic trading systems
- Ensure such facilities are offered in a transparent, non-discriminatory manner
- Ensure systems and controls are adequate for monitoring risks
Control
- Ensure appropriate controls are in place to reduce erroneous transactions such as off-market quotes or trades, fat finger errors, unintended or uncontrolled trading activity by members
Handling exigencies
- To deal with 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, an ETP operator shall put in place rules and regulations in a transparent manner
Dispute resolution
- Arrangement to address any dispute that may arise or is likely to arise between its members
Conclusion
While the RBI directive lists down essential criteria for bringing about key governance and controls into the system, a comparison with the regulations put forth by the European Securities and Markets Authority (ESMA) shows some key aspects that the RBI can further consider:
- Limiting the amount customers can borrow to ensure investor protection
- In the case of non-EU businesses, requirements are being drafted for trading platforms to be licensed in countries where their customers are based, not just where they are headquartered
- Diversification—in the form of new markets and products, and ease of introduction of new instruments
- Requirements around offering customers the chance to trade based on virtual currencies as they move on to the crypto bandwagon
With ETPs being encouraged across the world with a focus on enhancing pricing transparency, processing efficiency and risk control, the directives issued by the RBI should incorporate the above in due course, as collectively, they will be a key determinant in bringing about better market surveillance and in discouraging market abuse and unfair trading practices.
The complete discussion paper on the Electronic Trading Platforms (Reserve Bank) Directions, 2018, can be accessed here.
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