In the fast-paced world of financial markets, electronic trading platforms (ETPs) play a pivotal role in facilitating transactions. Recognizing their significance, the Reserve Bank of India (RBI) has introduced the draft Master Direction – RBI (Electronic Trading Platforms) Directions, 2024. This article provides an in-depth analysis of these regulations, covering various aspects such as eligibility criteria, operational guidelines, and compliance requirements.
Are you interested in trading? What platform do you use? Yeh exactly you are in the right direction, for those platform RBI brought some new rules into consideration
In today’s dynamic world of financial markets, or we can say secondary markets that means market where investors buy and sell securities from other investors via stock exchanges. For example, if you want to buy Vedanta stock, you would purchase the stock from investors who already own the stock rather than Vedanta ltd itself.
Vedanta Ltd would not be involved in the transaction, similarly electronic trading platforms (ETPs) play a important role in facilitating transactions in various financial instruments. Recognizing the importance of regulating these platforms for maintaining market integrity and investor protection, the Reserve Bank of India have recently introduced the draft Master Direction – Reserve Bank of India (Electronic Trading Platforms) Directions, 2024. These directions, issued under section 45W of the Reserve Bank of India Act, 1934, aim to provide a comprehensive framework for the operation and oversight of ETPs in India.
What is Section 45W of RBI act?
Here I am stating bare act
It is Power to regulate transactions in derivatives, money market instruments, etc.
(1) The Bank may, in public interest, or to regulate the financial system of the country to its advantage, determine the policy relating to interest rates or interest rate products and give directions in that behalf to all agencies or any of them, dealing in securities, money market instruments, foreign exchange, derivatives, or other instruments of like nature as the Bank may specify from time to time: Provided that the directions issued under this sub-section shall not relate to the procedure for execution or settlement of the trades in respect of the transactions mentioned therein, on the Stock Exchanges recognised under section 4 of the Securities Contracts (Regulation) Act, 1956(42 of 1956).
(2) The Bank may, for the purpose of enabling it to regulate agencies referred to in sub-section (1), call for any information, statement or other particulars from them, or cause an inspection of such agencies to be made.
What is the Scope and Commencement of the act?
The draft directions cover a broad area of aspects which are related to Electronic Trading Platform also known as ETPs, including their definition, eligibility criteria for operators, operational guidelines, risk management frameworks, reporting requirements, and provisions for offshore ETPs. The directions come into force immediately upon issuance, replacing the Electronic Trading Platform (Reserve Bank) Directions, 2018.
What are the Eligible instruments?
Eligible Instruments means securities, money market instruments, foreign exchange instruments, derivatives, or other instruments of like nature, as may be specified by the Reserve Bank from time to time under section 45W of Chapter III-D of the Reserve Bank of India Act, 1934, which contain or gives the power to RBI to regulate transactions made in instruments like derivatives, money market instruments, etc. and other related section of RBI Act is Section 45X, which mentions the duty to comply with directions and furnish information
In these Directions, the word, Entity means any person or organisation whether resident or non-resident, where a Non-resident means a person resident outside India as defined in Section 2(w) of Foreign Exchange Management Act, 1999 (42 of 1999)
What are the general Conditions and Eligibility Criteria?
Entities operating ETPs are required to obtain prior authorization from the RBI and follow the specific criteria that is related to shareholding, experience, net worth, and technological infrastructure.
General Criteria includes the entity shall be a company that should be incorporated in India, In case of the shareholding by non-residents in the entity that is proposing to seek authorisation as an ETP or Electronic trading platform operator shall conform to all the applicable laws and regulations, including the Foreign Exchange Management Act, 1999.
The entity seeking authorisation as an ETP operator or its key managerial personnel shall have experience of at least three years in operating trading infrastructure in financial markets.
What is Foreign Exchange Management Act, 1999?
The Foreign Exchange Management Act (FEMA) of 1999 is a Indian law which works on regulating foreign exchange transactions in India for promoting economic growth, maintaining the stability of the foreign exchange market, as well as preventing illegal activities, also it aims to facilitate payments and external trade i.e. import and export, hence it play an important role to promote the development and maintenance of the Indian forex market.
Financial Criteria includes an entity which is proposing to seek an authorisation as an Electronic trading platform operator under Reserve Bank of India (Electronic Trading Platforms) Directions, 2024 shall maintain a minimum net-worth of Rs.5 crore (Rupees five crore only) and shall continue to maintain the minimum net-worth prescribed herein at all times.
Technological Criteria includes the entity seeking authorisation as an Electronic trading platform operator shall, at least fulfil the technological requirements including Obtaining and maintaining a 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, secondly it shall ensure the capability to disseminate trade information on a real-time basis or near to real-time basis.
How to apply?
Entities which are meeting the above criteria may apply for authorization to operate an Exchange Traded Platform (ETP) with RBI, by submitting an application to the Chief General Manager, Financial Markets Regulation Department, Reserve Bank of India.
The Reserve Bank might ask for any further details, for gathering any additional information from other regulators or government bodies. In case of RBI satisfaction by the compliance of applicant with the criteria, it may grant authorization also it may impose some terms and conditions to operate the ETP, which would be final and non-transferable.
Can RBI cancel the registration?
After providing opportunity to be herd to the entity, the Reserve Bank have the authority to revoke or cancel an authorization granted to an entity to operate an Exchange Traded Platform, if it determines that certain conditions are not met such as there are violations of statutory provisions, regulations, or directives issued by the Reserve Bank, breaches of terms or conditions specified during authorization, or the situations which come up as in case authorization is continued, it may pose a threat to public interest or the financial stability of the country.
In the event of the rejection of application or authorization, the concerned ETP operator must cease operations immediately, unless otherwise specified by the Reserve Bank by a written communication, also the original letter of authorization must be surrendered to the RBI.
What is the Operating Framework of ETP?
An ETP operator is expected to follow a set of strict requirements including access, participation, and risk management to ensure the integrity and fairness of its operations.
Firstly, talking about access and participation, the ETP operator must establish transparent membership criteria, conduct a proper due diligence with respect to a new mwmber, and uniquely identify members using Legal Entity Identifiers (LEI) or Permanent Account Numbers (PAN).
Additionally, well-documented rules should be maintained by the operator governing membership procedures, pre and post-trade information disclosure, as well as ensuring that all relevant documents and regulations are readily accessible to members. This transparency fosters a fair and non-discriminatory environment for trading activities, enhancing market integrity.
Secondly, proper risk management measures are essential for maintaining the stability and reliability of the ETP. The operator is required to implement a proper and efficient risk management framework covering all operational aspects and pre-manage all the associated risks.
This includes, implementing access controls which ensure integrity in trading which help in preventing unauthorized entry, prevent unfair access by segregating the ETP from other financial services to, and enforcing fair and right trading practices.
Moreover, the operator should effectively monitor and manage risks arising from algorithmic trading systems, implement controls to prevent erroneous transactions, and establish protocols for handling exigencies such as system malfunctions or trading suspensions.
Lastly, the ETP operator must establish transparent dispute resolution mechanisms to address any conflicts that may arise among its members
What are the Steps taken for maintaining Technology and Information security?
Firstly Business Continuity and Disaster recovery, including contingency and disaster recovery arrangements that are appropriate to the nature, scale, and complexity of its business to ensure continuity and availability of its operation
Secondly ETP operator shall put in place robust information/cyber security controls and processes along with adequate information and data security infrastructure adhering to information/cyber security norms/guidelines.
Thirdly an ETP operator shall carry out IT/IS audit, at least once in a year, by auditors empanelled by Indian Computer Emergency Response Team.
What are the Reporting requirements?
An Exchange Traded Platform (ETP) operator is mandated to furnish quarterly reports on the functioning of platform to RBI by the 15th day of the month following the quarter along with any other information requested by RBI. Additionally, the operator must submit an annual compliance report stating following of regulatory directives and authorization terms by April 15th each financial year.
What is the process of termination of operations?
An ETP operator, who is holding a letter of authorisation to commence or carry on ETP operations, may terminate its operation with prior approval of the Reserve Bank after complying with the terms and conditions, along with surrendering original letter of Authorisation given by RBI
What are Offshore ETPs?
Operators of offshore ETPs desirous of providing residents with access to their platform for transactions with non-residents in eligible derivative instruments involving rupee or rupee interest rate as permitted by the Reserve Bank under the Foreign Exchange Management Act, 1999 shall apply for registration with the Reserve Bank
Are any Exemptions notified by RBI?
The Central Bank has the power to give permission for Exchange Traded Platform (ETP) operators not to apply these rules, or apply them differently, specific provisions may be set in leu of the Directions on an individual basis or as a group and subject to such terms, conditions, limits or restrictions as it may deem fit in the public interest or for financial stability. Also, the Reserve Bank of India exercises its discretion while licensing ETP operations and registering ETPs located abroad so as to protect integrity and stability of country’s financial ecosystem.
In conclusion, The Draft Master Direction – Reserve Bank of India (Electronic Trading Platforms) Directions 2024 is indeed a significant step towards regulating electronic trading platforms (ETPs) in Indian Financial Markets.
In general terms, these draft directions have been designed by RBI with an aim at effectively regulating and supervising ETPs which will help create conducive environment for growth and development sustainable Indian financial markets.
Source: Draft Master Direction – RBI (Electronic Trading Platforms) Directions, 2024
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