SEBI’s New SOP for MIIs: Enhancing Accountability and Technological Resilience in Market Infrastructure

Posted On - 28 November, 2024 • By - King Stubb & Kasiva

Introduction

The Securities and Exchange Board of India (“SEBI”) issued a circular in September 2024 introducing a Standard Operating Procedure (“SOP”) to manage financial disincentives for Market Infrastructure Institutions (“MIIs”) in case of technical glitches. Aimed at promoting accountability and operational efficiency, it specified penalty structures and reporting norms. In October 2024, a corrigendum was released to refine these provisions, addressing stakeholder feedback and practical implementation challenges. This framework clearly reflects the intention and commitment of SEBI toward ensuring market stability and protecting investors, under the overarching objective of facilitating ease of doing business in India’s financial sectors.

Link to the circulars:

  1. https://www.sebi.gov.in/legal/circulars/sep-2024/ease-of-doing-business-in-the-context-of-standard-operating-procedure-for-payment-of-financial-disincentives-by-market-infrastructure-institutions-miis-as-a-result-of-technical-glitch_86878.html
  2. https://www.sebi.gov.in/legal/circulars/oct-2024/corrigendum-to-circular-on-ease-of-doing-business-in-the-context-of-standard-operating-procedure-for-payment-of-financial-disincentives-by-market-infrastructure-institutions-miis-as-a-result-of-te-_87534.html

Explanation

The first circular that was published in September 2024, Ease of Doing Business in the Context of Standard Operating Procedure for Payment of Financial Disincentives by MIIs as a Result of Technical Glitch, has introduced a structured approach to disincentives emerging due to breakdowns in operational processes. The focus has largely been on ensuring that institutions like stock exchanges, depositories, and clearing corporations keep more robust technological frameworks in place to minimize undue disruptions in the marketplace.

This circular would detail the process of discovery, reporting, and penalizing MIIs in case of technical failures that affect their services. SEBI underlined how these were sensitive issues, considering technical failures in MIIs can cause massive ripples in market participants, investors, and a macro-level financial system.

Key Features and Provisions:

1. Definition of Technical Malfunction: SEBI defined what constituted a technical malfunction, which includes system failures or breakdowns resulting in trading, clearing, or settlement activities being interrupted. This definition eliminated much of the ambiguity between stakeholders regarding technical malfunction.

2. Imposition of Financial Disincentives: Financial disincentives were prescribed for MIIs as a measure to encourage proactive steps in mitigating technical failures. The circular emphasized that these penalties were not punitive but corrective, aiming to deter recurrence.

3. Payment Mechanism: The SOP outlined a structured timeline and method for the payment of financial disincentives. Payment of the penalties had to be done by MIIs within a specified time frame after identification and validation of the technical glitch.

4.Reporting and Transparency: MIIs were directed to report technical failures to SEBI and give an elaborate analysis of the incidents indicating cause of failure, mitigation steps taken, and remedial measures to be implemented.

5.Provisions for Redressal: SEBI offered the opportunity to MIIs to explain their case if they thought a penalty was unwarranted. The review mechanism was incorporated, facilitating fairness and reducing friction between regulators and institutions.

6.Ease of Compliance: This circular instituted ease of compliance measures towards these SOPs itself through SEBI’s  “Ease of Doing Business” drive. By codifying the responsibilities and the timelines, it reduced the bureaucratic hurdles and uncertainty for the MIIs.

The Second Circular: Corrigendum to the SOP (October 2024)

A month later, SEBI had issued a corrigendum fine-tuning some of the provisions in the first circular. This follow-up was to remove ambiguity, make the provisions more workable and to consider the feedback given by the stakeholders.

Changes Made

1. Upgrade of Definition of Technical Glitches: The corrigendum expanded the definition of what constitutes a technical glitch. The upgraded definition covered many new technologies and operational scenarios not considered initially, hence ensuring total coverage.

2. Adjustment of Determination of Penalty: SEBI modified the penalty determination to indirectly reflect the severity and duration of the technical disruption through introducing a graded penalty scheme, which linked disincentives to market impact and resolution time.

3.Flexibility in Reporting Mechanism: The corrigendum provided for staggered reporting of incidents in exceptional cases where comprehensive reporting was not possible immediately. It appreciated the operational challenge that occasional crises bring to MIIs.

4.Redressal Process Strengthening: The redressal process was strengthened in that penalty appeals by MIIs were made with more clarity in procedural conditions. A defined timeline was also incorporated for the response of SEBI on appeals so that it matures within fixed time frames.

5.Provisions for Minor Technical Issues: The corrigendum distinguished between minor and major technical glitches, relieving MIIs from stringent penalties for inconsequential disruptions. This distinction aimed to balance regulatory oversight with operational practicality.

Rationale Behind the Changes:

The changes reflect SEBI’s responsiveness to industry feedback. By refining provisions, the corrigendum reduced compliance burdens, improved proportionality in enforcement, and demonstrated SEBI’s commitment to fostering a collaborative regulatory environment.

Conclusion

The framework thus provided by SEBI for managing financial disincentives on technical glitches is a significant step in strengthening India’s financial market infrastructure. In fact, the first circular laid the foundation very robustly, while the corrigendum was addressed to operational challenges, reflecting a dynamic and responsible regulatory process. Accountability, technological resilience, and fairness have all contributed to investor confidence and market stability under SEBI. This initiative not only safeguards the interests of market participants but also aligns with India’s vision of a global financial hub. Going forward, sustained stakeholder engagement and adaptability will be critical to its continued success.