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SEBI's new proposals to strengthen governance on MIIs

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Published Date: 26 Nov 2024Updated Date: 30 Dec 20246 mins readBy MOFSL

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Introduction

The Securities Exchange Board of India (SEBI) has recently introduced proposals for the governance of Market Infrastructure Institutions (MIIs). They include stock exchanges, depositories, and clearing corporations. These entities form the backbone of India's financial markets. They are the reason behind efficient capital allocation and market stability. With this strengthening governance, SEBI aims to increase transparency, accountability, and the structural integrity of MIIs. This is to mitigate risks and uphold investor confidence.

Understanding the Role of Market Infrastructure Institutions

Market Infrastructure Institutions include stock exchanges, depositories and clearing corporations. The stock exchanges include The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Depositories comprise National Securities Depository Limited (NSDL) and Central Depository Services Limited (CSDL). These entities enable trading, secure investor holdings, and ensure seamless transaction settlements.

MIIs connect investors, issuers, and intermediaries. This results in liquidity, transparency, and market stability. Their efficient operations contribute to economic growth and build investor confidence. However, their systematic importance also means they highly impact the financial markets. Any failure could disrupt the financial ecosystem. This makes strong governance and supervision important. SEBI is taking charge of the same.

SEBI's report on strengthening governance of Market Infrastructure Institutions

SEBI prepared a report on 2nd November 2022 to strengthen the governance of MIIs. The formerly appointed whole-time member of SEBI, G Mahalingam, headed a committee to suggest measures for tracking the functioning of MIIs. The report covered a lot. Some of the highlights include enhancing accountability, clearly outlining the roles and responsibilities of all directors, regulating the process of appointing board members, etc.

SEBI's New Proposals for Market Infrastructure Institutions

After outlining the various measures for MIIs in the Strengthening Governance Report, 2 years ago., SEBI has recently made some other proposals for MIIs. Let's take a look at them:

A. New data-sharing policy

The Market Data Advisory Committee (MDAC) under SEBI proposed a new data-sharing framework for MIIs and other intermediaries. The data-sharing policy used previously, for analytic projects, research programs, and other requirements was introduced in 2018. It has now undergone reforms in SEBI's consultation paper, released on 8 October 2024.

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SEBI has stated that it has received several data-sharing requests to date. Based on its experience managing such requests, the regulatory body felt that the current policy needs modification. SEBI has proposed changes to fix some gaps to make the data-sharing process less of a hassle.

Under the new policy, data is classified into two baskets:

The data that can be shared with the public: This basket will contain only analysed and aggregated data. This will constitute data publicly available on MII portals or the data that needs further processing. MII will release such data against a fee.
The data that cannot be shared with the public: This basket will have more personal information. Examples include KYC details, holding data of individuals/entities, trade logs, etc. It would also include the identity of the entity or individual along with masked data. This can be used to identify individuals or entities one way or the other.

B. Use of AI/ML tools

In the consultation paper, released on 13th November 2024, SEBI proposed and new data-driven reform for MIIs. It states that MIIs and other SEBI-regulated entities that use Artificial Intelligence (AI) or Machine Learning (ML) tools are responsible for the privacy of investors' data and the output of such tools.

In the paper, SEBI has recognised the prevalent use of AL/ML tools in the financial markets to assist shareholders and investors in decision-making. These tools tend to play a vital role in analysing the market, selecting stocks, devising investment strategies, and building an investment portfolio.

These aspects lead to efficiency. They let you better understand your investments and manage risks. However, SEBI states that it is equally critical to ensure the protection of investor interest while using such tools.

Hence, SEBI has mandated MIIs and other authorised entities to report the usage of AI/ML systems. It has proposed to assign responsibility to MIIs and other intermediaries. SEBI also proposed amending its existing regulations to impose the obligations of accountability for data integrity, responsibility for AI outcomes, and compliance with laws. All MIIs and intermediaries are required to abide by these amendments.

Conclusion

SEBI's recent proposals add to its aim to strengthen the governance of MIIs. These reforms focus on enhancing transparency, accountability, and data security. With key initiatives like revising the data-sharing framework and mandating accountability for AI/ML tools, the goal is common. It is to protect your interests as an investor. By addressing operational gaps and prioritizing data integrity, these measures ensure the MIIs continue to uphold compliance integrity. SEBI's reforms ensure market stability while protecting your privacy and interests to let you invest confidently. They also contribute to India's financial ecosystem.