The Securities and Exchange Board of India (SEBI) has introduced a significant step to ensure the smooth functioning of the Indian stock markets in the event of technical disruptions. In a recent directive, SEBI has mandated that the two major stock exchanges in India, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), act as backup trading venues for one another during system outages. This initiative aims to safeguard investor interests and minimize the potential impact of any unexpected market disruptions. The new framework is expected to come into effect on April 1, 2025.
The Importance of Backup Trading Platforms
In a rapidly evolving financial environment, the possibility of technical glitches and system failures at stock exchanges is a reality that cannot be ignored. Such disruptions can create significant risks for investors, particularly those with open positions in the market. Price fluctuations, the inability to close positions, and volatility caused by unforeseen circumstances can expose investors to substantial losses.
To mitigate these risks, SEBI’s latest directive introduces a mechanism where the NSE and BSE can serve as alternative trading venues for each other. This system is designed to maintain continuity and stability in the market, ensuring that investors can still execute trades, hedge positions, and manage their portfolios, even in the event of a technical issue at one exchange.
SEBI’s New Framework: A Joint Effort Between NSE and BSE
The core of this new framework involves the creation of a joint Standard Operating Procedure (SOP) between NSE and BSE. This SOP will outline the roles and responsibilities of each exchange during a system outage, the steps they must take to facilitate seamless trading, and how they will communicate with each other and SEBI when such issues arise.
Both exchanges will need to prepare and submit this SOP to SEBI within the next 60 days from the issuance of the directive. The SOP must detail the processes involved in switching to the backup trading platform, ensuring minimal disruption for market participants.
According to the SEBI circular, initially, the NSE will act as the backup trading venue for the BSE, and vice versa. This means that if one exchange faces an outage, the other will step in to provide continuity, allowing investors to continue trading as usual. This step is crucial to ensuring that market activities are not halted, thereby protecting investors from adverse market conditions.
The Role of Clearing Corporations and Interoperability
One of the key features of this new framework is the emphasis on interoperability among clearing corporations. This will allow investors to hedge or offset their positions on an alternative exchange in the event of an outage. For example, if an investor has a position in a particular derivative on the BSE, they will be able to take a corresponding position on the NSE if the BSE is facing an outage. This flexibility will help to mitigate the risk of significant financial loss during a market disruption.
In addition, SEBI has directed that for products or scrips exclusively listed on one exchange, the other exchange must create reserve contracts. These reserve contracts will serve as a safety net, ensuring that investors have a way to manage their positions even when certain stocks or derivatives are only available on one exchange. This is particularly important for scrips that are not listed on both exchanges or for products that have no equivalent on the alternate exchange.
Addressing Gaps in Index Derivatives Products
Another important aspect of SEBI’s directive is the treatment of index derivatives products. In cases where one exchange does not have an index derivative product that is highly correlated with one available on the other exchange, SEBI has instructed exchanges to create such correlated products. This step will provide additional hedging options for investors during an outage.
For instance, while the NSE offers derivatives contracts based on indices like Nifty Financial, Nifty Midcap Select, and Nifty Next 50, the BSE currently lacks correlated products for these indices. To address this gap, SEBI expects the exchanges to consider the creation of similar indices and related derivative contracts to ensure that investors can continue to hedge their positions during an outage.
Prompt Action in Case of Outages
In the event of a technical issue, SEBI has set clear timelines for the exchanges to follow. The affected exchange is required to notify SEBI and the alternative exchange within 75 minutes of the occurrence of an outage. Once the notification is received, the backup exchange must activate its business continuity plan within 15 minutes to ensure trading can continue without significant delay.
This rapid response mechanism is designed to minimize any disruption to the market and ensure that investors’ positions are protected. The timely activation of the continuity plan is essential to maintaining investor confidence and ensuring that market activities proceed smoothly, even during unforeseen disruptions.
Implementation Timeline and Investor Protection
SEBI’s directive on interoperability and backup trading platforms is set to take effect on April 1, 2025. This gives both the NSE and BSE ample time to implement the necessary infrastructure changes, update their systems, and amend relevant by-laws. This preparation period is crucial for ensuring that the new framework can be smoothly integrated into the existing market infrastructure.
The ultimate goal of this initiative is to strengthen the disaster recovery mechanisms of both exchanges and enhance investor protection. By ensuring that there are alternative platforms available in case of an outage, SEBI aims to reduce the potential risks posed by technical disruptions and maintain the stability of the Indian financial markets.
SEBI’s new directive requiring the NSE and BSE to act as backup trading venues for each other is a significant step forward in ensuring market continuity. By fostering cooperation between the two leading exchanges and introducing measures for interoperability, SEBI is addressing the potential risks of market disruptions and safeguarding investor interests. As the market prepares for these changes, investors can look forward to a more resilient trading environment, where even in the event of a technical glitch, trading activities can continue with minimal disruption.
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