Move afoot to bring OTC trades to stock exchanges

Tags: News

Guidelines to prevent flash crash in equity market in the works

The Securities and Exchange Board of India (Sebi) is working to bring the over-the-counter (OTC) trades such as currency derivatives into the stock exchange platform, a move that will bring these transactions that are opaque and typically negotiated between banks.

Top Sebi officials said securities regulator was working closely with the banking regulator Reserve Bank of India (RBI) to get the process started. To begin with, the OTC transactions can be brought under the exchanges’ common clearing platform, Rajeev Kumar Agarwal, whole time member, Sebi, said at the CII Capital Market Summit on Wednesday.

S Ramann, ED, Sebi, said currency derivatives are concentrated in OTC trades due to “regulatory arbitrage” as the rules are tougher on the exchanges’ platform.

The Sebi view runs parallel to the global markets where there are similar move to bring OTC trades under the glare of exchange platform, which are transparent. For instance, America’s Dodd-Frank act of United States requires most OTC derivatives to be traded on a swap execution facility (SEF), which is defined as “a trading system or platform in which multiple participants have the ability to execute or trade swaps”. Across the Atlantic, drafts of the European Union’s Mifid 2 legislation would see liquid OTC derivatives move onto a similar platform called organised trading facility (OTF).

“Stock exchanges have to think of expanding range of products; they have the challenge of bringing more and more OTC products into their platform,” said Agarwal.

Sebi, chairman, UK Sinha earlier speaking at the same forum urged corporates to focus more on compliance and strengthen their internal control systems. He also stressed on the need for winning back the trust of the investors, particularly retail investors.”

Lamenting the fact that between 2009 and now, Rs 60,000 crore worth of regulator’s approval were allowed to lapse by companies who had filed DRHP with Sebi, presumably owing to market conditions, Sinha said that this has necessitated regulator’s intervention and examination of the deep-rooted causes.

Sebi guidelines to prevent flash crash in the equity markets like one that happened on NSE in October to protect the interests of investors will be in place within a few days, Sebi chairman said in a separate interaction with the media persons. “I expect the final guidelines in a few days,” he said.

Ashish Garg, partner and director, The Boston Consulting Group in a theme presentation on Indian Stock Exchanges said, “Capital formation in future will be aided a lot by stock exchanges, on the other hand client pressure is building on the stock exchange business with large investors coming, corporate governance will become more important.”

Garg said he expects by 2020, Indian stock market to have at least 1,000 $1billion dollar companies, a huge leap from 150 such companies as of now. The market cap is also expected to jump three times by 2020, he said.

“Technology, liquidity, corporate governance and listings will always remain relevant for the exchange business but liquidity will become fluid, making liquidity sticky in Indian capital market will be a challenge,” Garg said.

With inputs from Rajesh Abraham)


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