SEBI Calls on Stockbroking Firms to Implement Greater Surveillance and Supervision in New Report

The Securities and Exchange Board of India (SEBI) took steps last month to prevent and detect fraud and market abuse by issuing a Consultation Paper (CP) mandating that stockbrokers enforce greater surveillance.

The proposed changes in the CP (which had been long-anticipated after the Fair Market Conduct Committee issued recommendations in 2018) set out expectations for how financial firms should monitor market abuse, and establishes accountability if expectations are not met.

Although brokers will be responsible for implementing these changes day-to-day, the proposed regime explicitly puts compliance responsibility on brokerage firms’ most senior management. This ‘tone from the top’ approach is consistent with what we’re seeing in other jurisdictions globally.

The summary of the new requirements set out in the CP is as follows:

1. Stockbroking firms must implement a robust trade surveillance system and internal control procedures to detect and prevent fraud or market abuse. This should include a well-documented whistle-blower policy and appropriate channels.
   
   
2. These so-called “institutional mechanisms” should correlate with the size and scale of the firm’s operations (so while a spreadsheet-based regime might be satisfactory for some very small firms, it is unlikely to be sufficient for many). They should also be reviewed on a regular basis (at least once a year) to account for changing market conditions and regulations.
   
   
3. Any suspicious activity should be reported to exchanges immediately. Firms are also required to file a summary analysis and action taken report, detailing all instances of suspected fraud or market abuse. These reports should be filed on a half-yearly basis to stock exchanges.
   
   
4. A firm’s most senior management will be held accountable for non-compliance and negligence.

In addition to these requirements, the CP also spells out common market abuse scenarios (as well as factors to be considered when assessing such practices), a list of entities who should be surveilled, controls for monitoring, and the risks arising out of potential fraud or market abuse, as well as providing a sample accountability matrix.

It could be asked why India is only announcing these proposed changes now, since requirements around monitoring and surveillance by market participants are already in place in other major markets.

One potential answer is that Indian authorities were biding their time to see how market abuse regulations in other geographies played out in day-to-day practice. Now that they have a better idea of what works (and what doesn’t), India seems eager to promulgate its own market abuse rules to assert its rightful place as a major market and to assure outside investors that its exchanges are safe for business. Considering the size of India’s economy, that’s a very good thing. Whilst SEBI’s Consultation Paper is aimed at stockbrokers, it will be interesting to see how long it will take for similar requirements to be imposed on firms that trade other financial instruments in India.

If you work for a foreign bank operating in India, you likely already follow processes that your home jurisdiction uses to monitor for market abuse. But if that’s not the case, and your business needs to quickly implement an institutional mechanism for broker surveillance, reach out to us to see how we can help. Our end-to-end surveillance solution can bring you back to a compliant state within days.