The Reserve Bank of India (RBI) blames the massive shut down at the National Stock Exchange (NSE) on 24th February on the closure of the NSE Clearing Ltd (NCL).
In an article, titled, 'State of the Economy’ published in its monthly bulletin, the central bank says, "The major issue in this incident was the ineffectiveness of interoperability because of shutting down of the NCL...Another important failure was the inability to switch operations to the disaster recovery site...Brokers believe that timely communication and clarification could have averted the panic sell-off by online traders on the BSE and prevented huge losses to investors."
Trading was halted at the NSE for nearly four hours on 24th February 2021 reportedly due to telecom links failure leading to unavailability of the online risk management system of the NCL, a wholly owned subsidiary of the NSE, which is responsible for clearing and settlement of all trades executed on the NSE.
NSE stopped updating at 10.08am which led to closure of the futures & options (F&O) segment by 11.40am and cash market by 11.43am. It affected online risk management system, due to which market functioning had to be halted.
NSE had informed that trading was halted at 11.40am due to 'issues with the links with telecom service providers'. There was an issue with live ticks for NSE indices like Nifty 50, Nifty Bank, and others across brokers.
The outage occurred on the penultimate day of expiry of the February futures contracts when the transaction volume load was higher than usual.
The NSE is one of the largest derivatives exchanges in the world and accounts for the leading market share (by total turnover) in India - 93.2% in equity cash trading and 99.9% in equity derivatives trading during 2019-20, the report says.
On 24 February 2021, the turnover in the equity cash segment across the BSE and the NSE increased by 7.6% over the preceding trading day, which was mostly supported by a block deal. However, RBI says, aggregate notional turnover in stock options and futures and index options and futures declined by 45.1% and 20.1%, respectively, over the preceding trading day.
Besides the trading halt which led to disruption in market activity, the decline in turnover reflected absence of arbitrage opportunities following closure of one exchange and/or trading arrangements of some market participants only with NSE.
NSE announced extension of its trading session from 15:30pm to 17:00pm to enable squaring off of intra-day positions. The BSE, which functioned normally throughout, also stayed open late to facilitate this process.
Post the incident, the market regulator Securities Exchange Board of India (SEBI) has advised the NSE to carry out a detailed root cause analysis of the trading halt and the reasons for trading not migrating to the disaster recovery site.
Furthermore, the SEBI’s technical advisory committee has reportedly been mandated to probe the trading halt at the NSE and fix accountability.
"Allowing the benchmarks Nifty and Sensex to trade on all the stock exchanges, extension of interoperability to include usage of trading infrastructure of another exchange and allowing entry of more exchanges to increase competition may need to be considered, besides focusing on strengthening of risk management frameworks at the exchanges," the RBI says in the report.
Meanwhile, the ministry of finance (MoF) has asked the market regulator to share its finding based on the root cause analysis that NSE has been asked to submit within 21 days.
Earlier this month, finance minister (FM) Nirmala Sitharaman held a meeting to discuss the issue with key secretaries and SEBI chairman Ajay Tyagi, who is understood to have participated through video-conferencing. We learn that secretaries from the department of economic affairs (DEA), dept of financial services (DFS), department of investment and public asset management (DIPAM) and the revenue secretary were present in the meeting.
