LEI for Electronic Trading Platforms: RBI's New Guidelines for 2024

  • Legal Entity Identifier (LEI)
  • May 10, 2024

Overview

The Reserve Bank of India (RBI) exercised its authority under the Reserve Bank of India Act, 1934 to release the draft "Master Direction – Reserve Bank of India (Electronic Trading Platforms) ('ETPs'), Directions, 2024". The 2018 directives that ensured openness, effectiveness, and security in ETP operations have been replaced by the draft direction, which regulates organizations running ETPs. The draft intends to protect financial market integrity, improve transparency, and conform to changing market practices.

Important Points

The following is a discussion of the draft direction's key points:

i. Title, Extent, and Start Date:

"Master Direction - Reserve Bank of India (Electronic Trading Platforms) Directions, 2024" is the title of the instructions.
They are applicable to organizations running ETPs that help people deal using permissible instruments.
Certain electronic systems run by scheduled commercial banks and independent primary dealers are excluded, and they have unique reporting obligations.

ii. Explanations:

The definitions of a number of terminologies, including "recognised stock exchange," "approved," "algorithmic trading," "offshore ETP," "non-resident," "eligible instruments," "resident," "foreign exchange," “LEI Compliance” and "Legal Entity Identifier (LEI) number."

iii. General Terms and Conditions, Authorization Eligibility Standards, Authorization Grant and Cancellation:

To run an ETP, entities need to get RBI approval in advance.
Operators of ETPs are required to make sure that transactions only use RBI-approved instruments.
After the directions are issued, existing ETPs have three months to apply for authorization.
The prerequisites for eligibility are divided into three categories: general, financial, and technological. The organization must meet certain essential requirements, including being an Indian-incorporated company with a minimum net worth of Rs. 5 crore and three years of expertise managing trading infrastructure in financial markets.

Organizations that fit the eligibility requirements may submit an application for authorization, and the RBI may grant it if the applicant's eligibility is satisfied.

Before submitting an application for authorization, entities may also request "in-principle" approval.
A violation of any laws or RBI-specified terms is one of the conditions for cancellation of authorization, among other things.

iv. Information security (IS), technology, outsourcing of operations, and operating framework:

The guidelines outline expectations for ETP operators in terms of participation, access, risk management, algorithmic systems, trading integrity, handling emergencies, dispute resolution, surveillance, and transparency.
These instructions and the RBI requirements must be followed by the ETP operator's outsourced activities.
Business continuity, disaster recovery, information/cybersecurity controls, and IT/IS audits are the primary IT requirements.

v. Data Preservation, Access, and Use, Reporting Needs, and Operational Termination:

ETP operators are required to comply with data access regulations, preserve the confidentiality and security of all ETP data, and keep ETP data for a minimum of ten years.
The RBI must receive regular reports on the platform's operation, lei compliance status, transaction data, and event notifications.
The instructions outline the steps for stopping ETP operations with RBI consent in advance.

vi. Exemptions and Offshore ETPs:

The guidelines specify the conditions and steps that offshore ETP operators must follow in order to provide residents with services involving qualified derivative instruments.
Taking into account the necessity for financial system regulation or the public interest, the RBI may grant exemptions from certain provisions.

Framework for Operations

An ETP operator needs to follow these guidelines.

Access and involvement: An ETP operator is required to:

  • possess impartial, equitable, and transparent standards for membership;
  • Ensure that all members are onboarded with proper diligence, and keep track of all pertinent member information;
  • Use the Legal Entity Identifier (LEI) and/or Permanent Account Number (PAN) to individually identify each of its members;

Possess well-documented policies and procedures pertaining to, among other things, membership onboarding, suspension and termination, roles and duties of members and the operator, liability protection for the ETP and its users in the event that policies and procedures are broken, limitations or other conditions that might be relevant for using the ETP, order processing and execution, risk management, and control;

Provide its members with pre-trade information in a fair, non-discriminatory manner that complies with the transaction regulations, such as bid/offer prices, associated quantities, depth of trading interest, or such other information;

Provide its members with post-trade information in a fair, non-discriminatory manner that complies with the transaction regulations, such as the price, volume, and timing of transactions;

Make sure that all of the materials, guidelines, or policies mentioned in the aforementioned paragraph 7(a)(iv) are easily accessible to the members.

Managing Risks

(i) Comprehensive Risk Management Framework: An ETP operator must set up a thorough framework for risk management that addresses every facet of its business operations. It will make certain that operational hazards are appropriately recognized and handled.

(iii) Algorithmic systems: An ETP operator that permits algorithmic trading systems, or "algo systems," to participate shall:

Establish a structure for algo system testing and onboarding;

Make certain that these services are provided in an open, non-discriminatory way;

Make certain that the controls and systems they have in place are sufficient and efficient for tracking and handling the risks associated with algo systems;

(iv) Implementing Safeguards to Prevent Incorrect Transactions: An ETP operator must implement the necessary safeguards to lessen the possibility of incorrect transactions, such as off-market quotations or trades, fat finger mistakes, accidental or uncontrolled member trading, etc.

(v) Managing emergencies: An ETP operator must establish policies and procedures in a clear and understandable way to address emergencies such as trading suspensions or cancellations, system failures, improper use by members, or other unanticipated circumstances. It is important to handle such situations in lei compliance with established guidelines and policies.

(vi) Resolution of disputes: An ETP operator must set up a mechanism to handle any disagreement that might emerge or is anticipated to emerge amongst its members.

In summary

A strong regulatory framework is introduced in the draft master directive for organizations running ETPs in India. It includes a number of elements, including data management, risk management, operational requirements, reporting standards, and authorization criteria. Detailed eligibility standards, extensive risk management frameworks, strict IT/IS audit requirements, and explicit protocols for offshore ETP operators are among the major modifications made to the 2018 guidelines. These steps are intended to reduce risks and preserve the integrity of the Indian financial markets while promoting an electronic trading environment that is open, equitable, and efficient. ETP operators, banks, market players, and other interested parties are encouraged to provide comments and suggestions on the draft directives by May 31, 2024.

Source of Information: https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=4425

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