Regulatory functions separated at BSE, NSE

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The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have separated their regulatory and commercial functions. This is to ensure autonomy of the regulatory functions and creating a wall between the two key functions.

The separation is in keeping with Securities and Exchange Board of India (Sebi) rules set in April on the basis of the Bimal Jalan report. It is also as preparatory to possible listing of shares by both the exchanges.

The Sebi board had decided that a conflict resolution committee would be formed with majority external and independent members. It will deal with all issues concerning conflict of interest. The committee will consider matters of policy, guidelines involving issues of conflict and recommend standards pertinent to potential areas of conflict in the exchanges. Details of the committee are expected in a few days.

Issues of conflict are to be referred by the exchanges or taken up by the committee. Independent committees of the exchanges that are responsible, in parallel, for regulatory functions will have regular interactions with it.

“Regulatory functions such as shutting down the terminal of a broker, if there are any violation or non-compliance, will remain with the exchanges. Sebi will stay away from such micro- management,” said a person privy to the development.

The Sebi board had suggested a two-stage process to deal with conflicts of interest in risk management. According to Sebi, clearing and settlement must compulsorily be carried out through a recognised clearing corporation. Rules on this are also expected shortly.

It is learnt that clearing corporations will form a risk committee of independent members, which will report to the corporations’ boards. In addition to the risk committee, clearing corporations will be required to constitute statutory committees in line with the model adopted for stock exchanges.

BSE is going ahead with its plans to list its shares through an IPO or share sale by existing investors (mostly held by hundreds of individual brokers). NSE may also have similar plans to let existing investors, including a clutch of private equity funds, exit their stake.

The Sebi board had rejected the Jalan committee recommendation barring the listing of exchanges. Sebi had said: “In view of the decision taken regarding measures to address conflict of interest, separation of risk management functions to a clearing corporation, norms for trading regulation and surveillance, and compensation related norms, stock exchanges may be permitted to list.”


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