The RBI has released preliminary guidelines for regulating 'Electronic Trading Platforms' (ETP). The updated regulation is a revision of the 2018 framework, prompted by the growing integration of the Indian forex market with international markets, advancements in technology, and a wider range of products. The RBI had observed a rising demand for access to offshore ETPs offering authorized Indian Rupee (INR) Products.
The RBI defines an ‘Electronic Trading Platform (ETP)’ as “any electronic system, excluding a recognized stock exchange,” where transactions occur for various instruments including securities, money market instruments, foreign exchange instruments, derivatives, etc. To be acknowledged as an ETP by the RBI, operators of these platforms must obtain prior authorization for their platforms and instruments from the RBI within three months from the date of issuance of these guidelines.
For an organization to be authorized as an ETP in India, it must be incorporated in the country and have a minimum of three years' experience in operating trading infrastructure in financial markets. The organization must also maintain a minimum net worth of Rs.5 crore. Additionally, it is required to have robust technology infrastructure with high reliability, availability, scalability, and security in order to support its operations and manage associated risks. Furthermore, the organization must have the capability to disseminate trade information on a real-time or near real-time basis. The RBI has also specified that foreign shareholders of an authorized ETP in India must comply with all relevant laws and regulations in the country, including the Foreign Exchange Management Act, 1999.
The RBI has provided instructions outlining the different requirements that ETPs must adhere to, including the operation of their systems and the storage of data. Specific instructions have also been established for foreign or offshore ETPs.
Requirements for an authorized ETP
1) Operational Structure
ETP operators must adhere to objective, fair, and transparent practices when it comes to access and participation. This includes conducting thorough due diligence when onboarding members and ensuring that membership criteria are clearly defined. Members should be uniquely identified using Legal Entity Identifier (LEI) and/or Permanent Account Number (PAN). Additionally, pre-trade information such as bid/offer prices, related quantities, and depth of trading interest, as well as post-trade information such as transaction price, volume, and time, must be provided to members in a fair manner. It is also important to ensure that members are fully informed about all the rules and regulations mandated by the RBI.
Risk Management: The RBI requires ETPs to establish a comprehensive risk management framework that covers all operational aspects and ensures fair trading practices. In order to maintain the integrity of trading systems, ETP operators must implement access controls for members and separate the ETP from other financial services to prevent unauthorized access. Additionally, they must prevent non-compliant transactions and establish a framework for testing and onboarding algorithmic systems, with adequate monitoring to manage associated risks. ETPs are also required to implement controls to reduce the likelihood of erroneous transactions, such as off-market quotes, fat finger errors, and unintended or uncontrolled trading activity. Furthermore, they must have procedures in place to handle situations such as trading suspension, order/trade cancellations, system malfunctions, or any other unforeseen circumstances in accordance with established rules and regulations.
2) Monitoring and Openness:
To uphold market integrity, operators must monitor trading in real time and after the fact to ensure fairness and orderliness. They are also required to maintain transparency by identifying and disclosing any conflicts of interest, as well as having a clear fee structure for their members.
3) Delegating operational tasks:
Operators frequently delegate their operations to external entities. According to the RBI, operators are responsible for ensuring that these entities adhere to the required regulations and do not obstruct the operator's compliance. External entities must also uphold effective governance and risk management mechanisms, and continue to meet data requirements even after their arrangement with the ETP operator has concluded.
4) Data preservation, accessibility, and utilization:
The ETP operator is required to strictly control all data collected, maintaining it in easily retrievable media for a minimum of 10 years. It is also mandatory for the ETP operator to uphold confidentiality and security of all ETP data. Additionally, the RBI mandates that data required for any investigation by the Reserve Bank or any other authority as per Indian laws or regulations must be maintained for three years from the completion date of the investigation.
5) Technology and Information Security (IS):
To effectively recover from a disaster, an ETP needs to have a suitable Business Continuity Plan (BCP). Additionally, operators are required to conduct an IT/IS audit at least once a year by auditors approved by the Indian Computer Emergency Response Team (CERT-In). Furthermore, they must maintain a strong information/cyber security process and sufficient information and data security infrastructure in accordance with the relevant guidelines. The Reserve Bank of India also has the discretion to mandate an IT/IS audit of the ETP.
6) Requirements for reporting:
The ETP must submit a quarterly report on the 15th day of the month detailing the platform's operations, as well as an annual report on April 15th. Additionally, it is required to share all transaction information with trade repositories or reporting platforms, and provide data and information to relevant agencies and authorities. Furthermore, the ETP must promptly notify the RBI of any events that lead to disruptions in activities or market abuse.
7) The conclusion of the operation:
The ETP has the option to terminate its operations with prior approval from the Reserve Bank. If it chooses to end its operations ahead of schedule, it can surrender its letter of authorization to the Reserve Bank of India.
Offshore ETPs must meet the following requirements:
Offshore ETPs are now permitted by the RBI to facilitate transactions involving the rupee or rupee interest rates in India. These ETPs must adhere to the same due process as Indian ETPs and comply with eligibility criteria and guidelines set out by the RBI.
In order to obtain authorization from the RBI, an ETP must:
The entity must be established in a country that is a member of the 'Financial Action Task Force' and must be supervised by the financial market regulator of that country. The financial market regulator must be a member of either the 'Committee on Payments and Market Infrastructures' or the 'International Organization of Securities Commissions'. The entity must only facilitate transactions in "eligible derivative instruments" between residents and non-residents, which must involve rupee and/or rupee interest rates permitted by the Reserve Bank under the Foreign Exchange Management Act, 1999.
Instructions for offshore Exchange Traded Products (ETPs)
Offshore ETPs, similar to Indian ETPs, are required to submit all data and/or information to the Reserve Bank of India and report transaction information to any trade repository or reporting platform in the specified format and timeframe set by the Reserve Bank. They are also obligated to conduct an IT/IS audit at least once a year, carried out by auditors certified by their respective national authorities. Furthermore, any regulatory actions taken against them by any regulator must be reported to the RBI within one month. Additionally, they are prohibited from facilitating transactions between residents.
The RBI has requested feedback on the preliminary guidelines from all relevant stakeholders until May 31, 2024.