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Informist, Thursday, Nov. 7, 2024

 

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--SEBI Narayan: Market infra entities must strengthen governance, tech
--CONTEXT: SEBI whole-time member Ananth Narayan's comments at BFSI event
--SEBI Narayan: Bourses must ensure listed cos comply with disclosure norms
--SEBI Narayan: We try to ensure mkt infra entity board has diverse skills
--SEBI Narayan: Primacy of public interest must run deep in mkt infra entity
--SEBI Narayan: Case for clearing corporations to be independent
--SEBI Narayan: Consultation paper soon on clearing corporations' framework
--SEBI Narayan: Case for clearing corporations to have broad-based ownership
--SEBI Narayan: Mulling approving key mgmt personnel at mkt infra entities

 

MUMBAI – There is a case for clearing corporations to have broad-based ownership and be independent of the parent exchange in decision-making, in full charge of settlement guarantee fund corpus enhancements, and deployment of resources, Ananth Narayan, a whole-time member at the Securities Exchange Board of India said Thursday at an event. At present, clearing corporations are 100% owned by their parent stock exchanges. Speaking at the Business Standard BFSI Summit, Narayan said there was a need to review the entire construct of clearing corporations and parent stock exchanges, and said SEBI will be issuing a consultation paper soon on this matter.

 

Regulations do not permit clearing corporations to go public and list their shares, but when their parent exchanges list, it becomes a case of defacto listing. SEBI had been implicitly tolerating this, he said. However, since 2018, due to interoperability, a clearing corporation also settles trades of exchanges other than its parent exchange, and there was, hence, a need to review the construct.

 

"This interoperability has improved the ease of trading and settlement for investors, while allowing for better backup and redundancy in our securities ecosystem. It has also materially altered the implications of 100% ownership of a CC (clearing corporation) by a single exchange," Narayan said. Referring indirectly to the National Stock Exchange of India and its clearing corporation Narayan said "as on date the dominant equity clearing corporation, owned by the dominant exchange, clears over 85% of all cash and derivative equity market trades dealt on each of the large exchanges." Narayan said this "raised questions of the potential for actual or perceived conflict of interest" in the context of 100% ownership of clearing corporation by a single exchange.

 

Pointing to how the settlement guarantee fund was currently operated by the clearing corporation Narayan said clearing members do not contribute directly to the fund. "Instead, the CC (clearing corporation) itself, the exchanges from where the trades originate, and the owner of the CC must constantly enhance the SGF (settlement guarantee fund) on their own," he said.

 

Narayan said there was a case to consider making the clearing corporations truly independent and self-sufficient with broad-based ownership and with clearing members having "a risk-based skin in the game." Narayan acknowledged that to change this would lead to disruption "for all stakeholders." SEBI debated this issue at its secondary market advisory committee, he said. "In essence, some form of demerger of the equity stock exchange and the equity clearing corporation may perhaps be a way out, though there may be some legal and regulatory challenges to navigate," Narayan said.

 

Narayan said SEBI was also considering getting involved in approving the appointment by a market infrastructure entity such as stock exchange, depository, and clearing corporation, of specific key management personnel -- chief technology officer, chief information security officer, chief risk officer, and chief compliance officer. This is due to a "critical need to strengthen these vertical," he said. SEBI, according to the whole-time member, has already advised governing boards of market infrastructure institutions to upgrade these positions. The market regulator already requires these specific officials to "independently interact with the appropriate Governing Board Committees, which would also directly contribute to their annual appraisals."  

 

According to the whole-time member market infrastructure institutions must strengthen their governance framework, and "ensure that they are staffed by high-quality risk, compliance, and technology personnel." The governing board of a market infrastructure entity sets the tone at the top but "the culture of giving primacy to public interest must run deep amongst the management and employees of the MII as well," Narayan said. This was also since public interest directors on the board did not run the institution on a day-to-day basis.

 

Narayan stressed on the aspect that market infrastructure entities are charged with ensuring investor protection and market integrity. In the case of stock exchanges, they must "ensure adequate disclosures by issuers of securities", and all market infrastructure entities must "conduct appropriate surveillance to deliver a free and fair market bereft of unfair trading practices, manage risks and operations to deliver smooth clearing and settlements, monitor the conduct of brokers and other intermediaries, and ensure that market technology platforms and ledgers are fair, secure, reliable, and resilient," Narayan said.  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Rajesh Gajra

Edited by Deepshikha Bhardwaj

 

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