Draft directions a boost for electronic trading platforms

The Reserve Bank of India (RBI) on 12 October released a draft framework for authorization of platforms for electronic trading of regulated financial instruments. In a statement on 4 October advising financial sector entities of the proposed move, the RBI had noted that electronic trading platforms (ETPs) encourage transparency in pricing and discourage unfair trading practices. The objectives of the directions include: (a) promoting fair, equitable, and non-discriminatory access to markets; (b) ensuring financial integrity; and (c) reducing “information asymmetry” by improving dissemination of trading information.

The draft directions define an ETP as an electronic system or facility, other than a recognized stock exchange, that facilitates the buying and selling of eligible instruments. Eligible instruments are defined as securities, money market instruments and prescribed foreign exchange derivatives. An ETP operator would need to be authorized by the RBI to operate an ETP. An ETP operator that offers clearing and settlement services would also need to be authorized by the RBI under the Payments and Settlement Systems Act, 2007.

The draft directions appear to have been carefully prepared. In addition to the regular suite of prescriptions on eligibility criteria and the conduct of an ETP operator, the draft directions also contain prescriptions that reflect the RBI’s astute perception of an ETP not only being a financial but also a technological platform. For instance, in line with global best practice, the draft directions contain prescriptions on data security infrastructure, periodic systems audits, data preservation, and business continuity processes. Notably, the draft directions also contemplate ETPs offering high-frequency or algorithmic trading solutions to their members.

Sawant Singh and Aditya Bhargava are partners at the Mumbai office of Phoenix Legal.