In a rare, tough measure aimed at reducing the instances of technical glitches occurring at market infrastructure institutions (MIIs) like stock exchanges, clearing corporations and depositories, the Securities and Exchange Board of India (SEBI) on Monday released new rules that will make such institutions and their officials liable in the event of failure to provide services.
SEBI has issued a detailed framework for penalising market infrastructure institutions (MIIs)— which includes stock exchanges, clearing corporations and depositories— for technical glitches. MIIs are systemically important institutions as they provide infrastructure necessary for the smooth and uninterrupted functioning of the securities market, SEBI said.
Under the new framework, MIIs will have to pay Rs 100,000 per day in case of delay in submission or incomplete submission of root cause analysis (RCA). The regulator has said a comprehensive RCA report needs to be submitted within 21 days of the incident.
Meanwhile, failure to timely address technical glitch will attract Rs 200,000 per day for the first 15 days, Rs 300,000 per day for subsequent 15 working days and beyond 30 working days Rs 25 lakh additional.
Failure to declare disaster within stipulated timelines could attract financial disincentive of 10% of average of standalone net profit for previous two financial years or Rs 2 crore, whichever is higher on the MII. While the MD and CTO will have to part 10 per cent each of their annual pay (both fixed and variable components) for the financial year when the disaster occurred.
Failure to restore operations within a recovery time objective may attract similar penalties both on the MII as well as the MD and CTO.
In the event of a disaster, the MII has to restore its operations, including critical systems, from a disaster recovery site within 45 minutes.
There will be further penalties for failing to restore operations of critical systems including from disaster recovery site within three hours.
SEBI added that in the event of any business disruption, which is not required to be declared as “disaster”, the MII fails to restore normalcy of operations within 75 minutes of the incident, it will attract penalty of Rs 50 lakh and if the same extends beyond three hours, the penalty will increase to Rs 1 crore.
The penalty will kick in if there is delay in submission or incomplete submission of root cause analysis(RCA) report within 21 days of the incident.
“With increasing dependence on technology, as the operations and functioning of MIIs are fully automated right from order entry to order matching to trade confirmation leading up to clearing and settlement of trades, the instances of technical glitches at MIIs, leading to business disruption/unavailability of services provided by MIIs, have been occurring, despite various mechanisms stipulated by SEBI such as Business Continuity Planning, Disaster Recovery policies, System Audit,”the SEBI master circular points out.
The general practice in the computing/technology industry to deal with business disruption/unavailability of services, is to work with specified downtime and for downtimes beyond such specified time, a pre-defined penalty structure is included in Service Level Agreement.
“Considering the criticality of smooth functioning of systems of MIIs, specifying a pre-defined threshold for downtime of systems of MIIs becomes desirable. For any downtime or unavailability of services, beyond such pre-defined time, there is a need to ensure that 'Financial Disincentive' is paid by the MIIs as well as Managing Director and Chief Technology Officer,” SEBI said in its master circular.
“This will encourage MIIs to constantly monitor the performance and efficiency of their systems and upgrade their systems etc. to avoid any possibility of technical glitches and restart their operations expeditiously in the event of glitch,” SEBI said.
The market regulator’s move comes in the wake of the numerous failures of NSE’s systems in the last few years (and a significant trading outage in February 2021). The NSE glitch in February this year had led to a trading halt that lasted several hours and resulted in huge losses for traders. Even the finance ministry had taken note of the issue and asked SEBI to avoid a repeat of the incident.
SEBI said that the new rules are being issued in the interest of investors to promoting the development of the securities market in the country, and will come into effect from 16 August 2021.