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How SEBI's New Rules Are Transforming Off-Market Trades Through NSE and BSE

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Published Date: 29 Dec 2024Updated Date: 29 Dec 20246 mins readBy MOFSL

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Introduction

The Securities and Exchange Board of India (SEBI), known for its regulatory acumen, has introduced a groundbreaking regulation to enhance India’s trading ecosystem. This regulation enables the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) to function as Alternative Trading Venues (ATVs) for each other during any outages. Effective from April 1, 2025, this structure seeks to improve investor protection and preserve market stability due to unforeseen events.

What is an Alternative Trading Venue (ATV)?

The ATV is an initiative that arises from a dedication to modernise India's trading ecosystem and synchronise it with global best practices. In the event of any technical malfunctions or outages, the exchanges (BSE/NSE) can function as a backup exchange for each other, hence the name Alternate Trading Venue.

As per SEBI guideline, the impacted exchange must notify the alternate trading venue and SEBI within 75 minutes of the incident. After getting the notice, the secondary exchange should apply the business continuity plan (BCP) within 15 minutes. The functionality will be applicable for segments such as cash, derivatives, currency derivatives, and interest rate derivatives.

SEBI hopes to fill the gaps in India's trading infrastructure by using this model, therefore enabling institutional investors to participate in trading with more confidence.

Operational Mechanisms of NSE and BSE as ATVs

SEBI's move to implement ATVs is set to transform the trading landscape in India. Both the NSE and BSE, recognised for their technological capabilities, will serve as facilitators for handling these transactions. Here is how these platforms will ensure a smooth transition:

Standard Operating Procedure

After consulting with exchanges, SEBI has determined that NSE will serve as an alternative trading platform for BSE to begin with, and vice versa. To guarantee a smooth implementation, it is imperative that both exchanges establish a unified Standard Operating Procedure (SOP). This SOP outlines the roles and responsibilities of the affected exchange and its alternate trading venue during a disruption, including the sequence of events. SEBI must receive completed SOPs from exchanges within 60 days.

Appropriate Infrastructure

SEBI has ordered Clearing Companies (CCs) and exchanges to build infrastructure and systems to implement this circular. This includes amending their bylaws, rules, and regulations. SEBI has mandated that exchanges and clearing corporations enhance their system monitoring and establish standby procedures. This includes automated failover systems and ongoing real-time monitoring to avert disruptions or alleviate their impacts.

Risk Management

In order to improve risk management, SEBI highlighted that any exchange lacking a highly correlated index derivatives product that is available through another exchange ought to think about creating one. The introduction of futures contracts on these indices will give players a reliable way to hedge their positions in case of an interruption at a single exchange.

Continuity

Exchanges are urged to establish reserve contracts for securities listed solely on one exchange to ensure uninterrupted trade. Similarly, it is essential to establish reserve contracts to guarantee ongoing trading on the unaffected exchange during outages on the other market. This is especially crucial for assets commonly traded on multiple exchanges, such as single stock derivatives or index-linked products.

To assess the resilience of the alternative trading system and the standard operating procedures, exchanges and clearing corporations must perform regular simulated trading sessions. These seminars will ensure that all stakeholders, including brokers, clearing members, and investors, are familiar with the processes and can effortlessly adapt to alternative arrangements during genuine disruptions.

Obstacles to Address

Although regulations represent progress, specific problems can arise. They are:

Technological Readiness: The success of ATVs depends on the technological ability of NSE and BSE to manage the intricacies of off-market transactions.
Investor Awareness: Institutional participants must be informed about the advantages of these platforms to facilitate broad adoption.
Regulatory Compliance: Ensuring stringent conformity to SEBI’s regulations necessitates the use of effective monitoring systems.

Conclusion

India's financial markets are on the brink of a transformation, and SEBI's new norms may serve as a catalyst for unparalleled innovation and development. SEBI's proposal to convert NSE and BSE into ATVs is an essential step in India's financial sector. The rules rectify current inefficiencies and conform to global standards, fostering a more sustainable and inclusive trade environment in case of any outage on either platform. As these platforms gather momentum, they are expected to generate substantial value for both investors and the economy as a whole.