Summary: SEBI issued a circular on September 20, 2024, revising its Standard Operating Procedure (SOP) for imposing “financial disincentives” on Market Infrastructure Institutions (MIIs) due to technical glitches vide Circular No : SEBI/HO/MRD/TPD-1/P/CIR/2024/124 dt 20th September 2024. The key change is the removal of individual financial penalties on the Managing Director (MD) and Chief Technology Officer (CTO) of MIIs, following industry recommendations and consultations with SEBI’s Technical Advisory Committee. Previously, MDs and CTOs were held personally accountable for technical failures. Now, penalties will apply only to MIIs, shifting the focus towards institutional responsibility rather than individual culpability. SEBI retains the right to enforce individual penalties if substantial evidence of negligence or mismanagement by key individuals is found. MIIs are required to report details of financial disincentives imposed due to technical failures, and listed MIIs must disclose this information as per SEBI’s listing regulations. The circular aims to enhance the Ease of Doing Business for MIIs while ensuring accountability and continuous improvement of their IT infrastructure to prevent future glitches.
References:
- SEBI Master Circular for Stock Exchanges and Clearing Corporations dated October 16, 2023
- SEBI Master Circular for Depositories dated October 06, 2023
Key highlights of the circular are:
- These above circulars have specified the Standard Operating Procedure (SOP) for handling of technical glitches by Market Infrastructure Institutions (MIIs) and payment of “Financial Disincentives” thereof.
- It has a provision for automatic trigger of financial disincentive on the MII and individuals i.e. Managing Director (MD) and Chief Technology Officer (CTO) of the MII if predefined criteria in handling of technical glitches are not adhered to.
- SEBI received recommendations/references to review imposition of Financial Disincentive on individuals from various fora like Committee on “Strengthening Governance of Market Infrastructure Institutions”, Working Group on Ease of Doing Business (EoDB) and Technical Advisory Committee (TAC) of SEBI.
- Separately, MIIs had also jointly represented that such disincentives on individuals may be reviewed for Ease of Doing Business of MIIs.
- Operations of MIIs are increasingly becoming system driven, with them operating constellation of IT systems (both software and hardware) having dependency on various vendors/ service providers.
- The test for ascertaining any individual responsibility for a technical glitch would entail ascertaining if there have been any act of omission /commission, including if an MD/CTO did or did not ensure adequate oversight/resources/checks and balances to prevent such glitch reasonably and by definition such a test would require application of mind and assessment.
- Accordingly, in line with discussions with TAC and other fora mentioned above, it has been decided to restrict imposition of existing financial disincentives to MIIs only.
- SEBI shall provide an opportunity to the concerned MII to make its submission in respect of glitch which shall be considered by SEBI before imposing any financial disincentive as per the instant framework
It has been decided to modify para 9.3 of Chapter 2 of SEBI Master Circular for Stock Exchanges and Clearing Corporations dated October 16, 2023, and Para 4.70 of SEBI Master Circular for Depositories dated October 06, 2023, as follows:
Original form Para 4.70.4 of SEBI Master Circular for Depositories dated October 06, 2023, as follows:
“Considering the criticality of smooth functioning of systems of MIIs (as any disruption adversely impacts all classes of investors / market participants as well as the credibility of the securities market), specifying a pre-defined threshold for downtime of systems of MIIs becomes desirable. For any downtime or unavailability of services, beyond such pre-defined time, there is a need to ensure that “Financial Disincentive” is paid by the MIIs as well as Managing Director (being the executive head in – charge of all the day to day operations) and Chief Technology Officer (being the executive head in charge of technology) of the MII. This will encourage MIIs to constantly monitor the performance and efficiency of their systems and upgrade/ enhance their systems etc. to avoid any possibility of technical glitches/disruption/disaster and restart their operations expeditiously in the event of glitch/disruption/disaster.”
As per this circular
“Considering the criticality of smooth functioning of systems of MIIs (as any disruption adversely impacts all classes of investors / market participants as well as the credibility of the securities market), specifying a pre-defined threshold for downtime of systems of MIIs becomes desirable. For any downtime or unavailability of services, beyond such pre -defined time, there is a need to ensure that “Financial Disincentive” is paid by the MIIs. This will encourage MIIs to constantly monitor the performance and efficiency of their systems and upgrade/ enhance their systems etc. to avoid any possibility of technical glitches/disruption/disaster and restart their operations expeditiously in the event of glitch/ disruption/disaster.
- Removal/Omitted of statement “as well as Managing Director (being the executive head in – charge of all the day to day operations) and Chief Technology Officer (being the executive head in charge of technology) of the MII” form the original circular.
- Financial disincentive on Managing Director (MD) and Chief Technology Officer (CTO) of MII Separately” as mentioned in Clauses 3,4,5 of Annexure XII to the Master Circular for Stock Exchanges and Clearing Corporations dated October 16, 2023, and Clauses 3,4,5 mentioned under sub – para 4.70.5.B of the SEBI Master Circular for Depositories dated October 06, 2023, stand deleted
- The words “MD and CTO” in Clause 7 of Annexure XII of the Master Circular for Stock Exchanges and Clearing Corporations dated October 16, 2023, and Clause 7 mentioned under para 4.70.5.B of the SEBI Master Circular for Depositories dated October 06, 2023, stand deleted.
Original from para 4.70.5.B of the SEBI Master Circular for Depositories dated October 06, 2023
8. Further, the MII shall submit a compliance report within 90 days of occurrence of disaster/ business disruption to SEBI providing details of payment of “financial disincentives” including computation of “financial disincentives” as per the SOP and the date when the amount was credited to the aforementioned funds. With regard to “financial disincentive” on the MD/CTO of the MII arising out of the variable pay component, the compliance report shall be submitted within 30 days of determination of variable pay of the concerned officials for the financial year when the disaster occurred.
As per new circular
8. Further, the MII shall submit a compliance report within 90 days of occurrence of disaster/ business disruption to SEBI providing details of payment of “financial disincentives” including computation of “financial disincentives” as per the SOP and the date when the amount was credited to the aforementioned funds.
Omitted: “With regard to “financial disincentive” on the MD/CTO of the MII arising out of the variable pay component, the compliance report shall be submitted within 30 days of determination of variable pay of the concerned officials for the financial year when the disaster occurred.”
Clause 9, Original from para 4.70.5.B of the SEBI Master Circular for Depositories dated October 06, 2023
9. With regard to the requirement of payment of “financial disincentive” on the aforesaid officials of the MII (i.e. MD and CTO), the MII shall insert a suitable clause in the terms of appointment of these officials and/ or in the Internal Code of Conduct of the MII to comply with the “financial disincentive” requirements.
As per new circular:
10. MIIs shall disclose on their websites (and in their respective annual reports), the details of financial disincentive paid by them on account of technical glitches. Further, listed MIIs shall make appropriate disclosures required in terms of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 regarding any financial disincentive imposed by SEBI on account of technical glitch.
New clauses have been inserted in Clause 2 as below:
2.3 SEBI on identification of the Technical Glitch resulting into Financial Disincentive to the MIIs, or upon receipt of the information of any such instance shall provide an opportunity to the concerned MIIs to make their submissions in respect of the facts of the case.
2.4 MIIs shall carry out internal examination pertaining to occurrence of technical glitches to ascertain individual accountability and take appropriate action including suitable recording and reckoning in the performance appraisal of those individuals. SEBI would retain the right to initiate enforcement action against the individuals at the MII, if there is sufficient ground to do so.
What are market infrastructure institutions
Market Infrastructure Institutions (MIIs) are financial entities that provide essential infrastructure for running daily operations in the stock market and capital markets. They include institutions such as stock exchanges, clearing corporations, and depositories. MIIs form the backbone of the capital market and are vital for economic growth. They provide services for trading, clearing, settlement, matching of financial transactions, and depository functions.
Examples of MIIs
1. Stock exchanges,
2. depositories and
3. clearing houses
Author Bio
