Business Continuity For Interoperable Segments Of Stock Exchanges

Introduction

Interoperability is a mechanism that allows market participants to choose one clearing corporation to settle the trades, irrespective of the exchange where the trades are executed. The Securities and Exchange Board of India (“SEBI”) has successfully implemented interoperability among Exchanges/Clearing Corporations (“CC”), revolutionizing settlement processes. Previously, trades executed on National Stock Exchange (“NSE”) were cleared through NSE Clearing Limited, and trades on Bombay Stock Exchange (“BSE”) were cleared through Indian Clearing Corporation Limited (“ICCL”). However, with interoperability, trades from both NSE and BSE are now settled through a single clearing corporation. 

In case of interruption of service of a trading venue (i.e. stock exchange) during trading hours, where the participants are exposed to price risk, as there could be material news flow. In such a case, the multi exchange set up along with interoperability among CCs could be used to provide an alternative trading venue to end investors. A working group of stock exchanges, CCs and representative qualified stock brokers (“QSBs”) was created to deliberate the matter. In view of the deliberations of the 2-aforesaid working group and subsequent discussions with Secondary Market Advisory Committee of SEBI, following has been decided for the interoperable segments of stock exchanges (Cash Market/ Equity Derivatives/ Currency Derivatives/ Interest Rate Derivatives etc.):

• Hedging with Identical or Correlated Products: If identical or correlated products (stocks, currency derivatives, interest rate derivatives) are available on another exchange, participants can hedge by taking offsetting positions. Since these segments are interoperable, this will net off open positions for clients and release margin, requiring no separate treatment for these products.
• Reserve Contracts for Exclusively Listed Scrips: Exchanges may create reserve contracts for scrips exclusively listed on other exchanges, or single stock derivatives not traded on their exchange, to ensure continuity during an outage on the other exchange.
• Creating Correlated Index Derivatives: If an exchange does not have a correlated index derivative, it may create one to allow hedging of positions during an outage on another exchange.
• Notification to SEBI and Alternative Venue: The affected exchange must inform SEBI and the alternative venue within 75 minutes of a technical issue. The alternative venue must activate its business continuity plan within 15 minutes, as per its Standard Operating Procedure (“SOP”).

After discussions with exchanges, it has been decided that NSE will act as an alternative trading venue for BSE, and vice versa. Both exchanges will create a joint SOP detailing the process to follow during an outage, including the roles and responsibilities of each exchange and any system changes required for brokers/CCs to implement measures for end investors. This SOP must be submitted to SEBI within 60 days of the circular.

Furthermore, Stock Exchanges and Clearing Corporations are directed to:

1. Implement necessary infrastructure and system changes, including amendments to relevant bye-laws, rules and regulations.
2. Notify their members and publish the circular on their website.
3. Report the status of implementation to SEBI.

Conclusion

This SEBI circular outlines measures to ensure continuity in trading during technical outages or disruptions across stock exchanges. It establishes interoperability between exchanges for segments like cash markets, equity derivatives, and currency derivatives, allowing participants to hedge positions across venues. The circular mandates creating reserve contracts for exclusive scrips during outages and introducing new index derivatives if no correlated products exist. It also requires NSE and BSE to develop a joint Standard Operating Procedure for handling outages.

The said provisions of this circular has been issued under Section 11(1) of the Securities and Exchange Board of India Act, 1992, to safeguard investor interests, promote market development, and regulate the securities market, and shall take effect from April 1, 2025.