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RBI Issues Draft Master Direction for Electronic Trading Platforms, 2024

Background

The Reserve Bank of India (‘RBI’) has issued the draft ‘Master Direction – Reserve Bank of India (Electronic Trading Platforms) (‘ETPs’), Directions, 2024[i]’, exercising its powers under the Reserve Bank of India Act, 1934. The draft direction governs entities operating ETPs superseding the previous directions issued in 2018 ensuring transparency, efficiency, and security in ETP operations. The draft aims to align with evolving market practices, enhance transparency, and ensure the integrity of financial markets.

Key Highlights

The important points from the draft direction are discussed below:

i. Title, Scope, and Commencement:

  • The directions are titled ‘Master Direction – Reserve Bank of India (Electronic Trading Platforms) Directions, 2024’.

  • They apply to entities operating ETPs facilitating transactions in eligible instruments.

  • Exclusions exist for certain electronic systems operated by scheduled commercial banks and standalone primary dealers, with specific reporting requirements.

ii.  Definitions:

  • The directions interalia provide the definition of various terms such as Algorithmic trading, Approved, ETP, Eligible Instruments, ETP Operator, Non-resident, Offshore ETP, Foreign exchange, Resident, and Recognised stock exchange.

iii. General Conditions, Eligibility Criteria for Authorization, Grant and Cancellation of Authorization:

  • Entities must obtain prior authorization from the RBI to operate an ETP.

  • ETP operators must ensure transactions only involve instruments approved by the RBI.

  • Existing ETPs must apply for authorization within three months of the issuance of the directions.

  • The eligibility criteria consist of general, financial, and technological requirements. One of the key criteria is that the entity must be a company incorporated in India, maintain a minimum net worth of Rs. 5 crores and possess three years of experience in operating trading infrastructure in financial markets.

  • Entities meeting eligibility criteria can apply for authorization and the RBI can approve such authorization based on the eligibility satisfaction of the applicant.

  • Entities may also seek ‘in-principle’ approval before applying for authorization.

  • Conditions for cancellation of authorization interalia include violations of statutory provisions or terms specified by the RBI.

iv.   Operating Framework, Outsourcing of Operations, Technology and Information Security (IS):

  • The directions specify requirements related to access, participation, risk management, trading integrity, algorithmic systems, handling exigencies, dispute resolution, surveillance, and transparency for ETP operators.

  • The ETP operator's outsourcing operations must ensure compliance with these directions as well as with the RBI regulations.

  • The IT requirements mainly include business continuity, disaster recovery, information/cybersecurity controls, and IT/IS audits.

v.  Preservation, Access, and Use of Data, Reporting Requirements and Termination of Operations:

  • ETP operators must maintain ETP data for at least 10 years comply with data access and shall maintain confidentiality and security of all ETP data.

  • The reporting requirements include regular reports on platform functioning, compliance status, transaction information, and event notification to the RBI.

  • The directions specify procedures for terminating ETP operations with prior approval from the RBI.

vi.   Offshore ETPs and Exemptions:

  • The directions outline requirements and procedures for offshore ETP operators offering services to residents involving eligible derivative instruments.

  • The RBI may grant exemptions from certain provisions, considering public interest or financial system regulation needs.

Conclusion

The draft master direction introduces a robust regulatory framework for entities operating ETPs in India. It encompasses various aspects such as authorization criteria, operational requirements, risk management, data management, and reporting standards Significant changes from the 2018 directions include detailed eligibility criteria, comprehensive risk management frameworks, stringent IT/IS audit requirements, and clear procedures for offshore ETP operators. These measures are designed to foster a transparent, fair, and efficient electronic trading environment while mitigating risks and safeguarding the integrity of financial markets in India. Comments and feedback on the draft directions are invited from ETP operators, banks, market participants, and other interested parties by 31.05.2024.




End Note

[i] Press Release No. 2024-25/211, Dated 29-4-2024.




Authored by Pranav Dabas, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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