IND SEBI Stock Broker Market Abuse

On Feb. 7, IND SEBI proposed a mechanism to prevent market abuse.

  • IND SEBI proposed an institutional framework which requires stock brokers to be accountable for the detection and prevention of fraud or market abuse.
  • Key Proposals
  • Currently, there are no regulatory requirements that cast responsibility on stock brokers to put in place systems to detect and prevent fraud or market abuse.
  • In the proposed framework, senior management will have the responsibility of setting up a robust trade surveillance system, to ensure compliance with the regulations.
  • Audit committee and board of broker to review compliance with the framework at least once a quarter, also verify the reporting systems are adequate, operating effectively.
  • Broker shall have systems in place to ensure that proprietary accounts are used only for the purpose of carrying on proprietary trades which are in line with the various regulatory requirements, as have been laid down by IND SEBI and stock exchanges.
  • No lending of any proprietary accounts for facilitation of any unauthorized trading.
  • As part of the escalation and reporting mechanism, the broker will have well-defined processes that detect potential fraud or suspicious trading activities to be escalated.
  • Escalation processes should be properly documented and implemented so as to keep independent senior management informed of any instances of potential fraud, etc.
  • Brokers shall submit a summary analysis and action taken report on instances of suspected fraud or market abuse on a half-yearly basis to stock exchanges.
  • Broker will implement and maintain a well-documented policy setting out availability of whistle blowing channels, process for raising concerns about suspected fraudulent, unfair, or unethical practices, violations of regulatory or legal requirements, etc.
  • Effectiveness
  • Comments on the consultation paper may be submitted by Feb. 21, 2023.
  • In May 2023, IND SEBI proposed rules on prohibiting suspicious trades, see #173169.
  • Jul. 2024 IND SEBI Instituted Measures
  • On Jul. 4, 2024, IND SEBI issued measures to instill confidence in securities market re brokers' institutional mechanism for prevention, detection of fraud or market abuse.
  • It decided stock brokers shall comply with the following obligations/mechanisms in chapter IVA of Securities and Exchange Board of India (stock brokers) (amendment) regulations 2024 i.e. systems for surveillance of trading activities and internal controls.
  • Plus, obligations of stock broker and its employees; escalation, reporting mechanisms; whistleblower policy; table in circular lists effective date for implementation for different stock brokers; standards for implementation of same shall be formulated.
  • For stock brokers with less than 50k unique client codes (UCCs), operational working modalities and guidance note is effective from Jan. 1, 2025; for those between 2.001k - 50k, effective date is Apr. 1, 2025; and for 0 to 2k, effective date is Apr. 1, 2026.
  • For qualified stock brokers (QSBs), given enhanced obligations and responsibilities i.e. governance structure and processes and surveillance of client behavior are already being adhered to, effective date for implementation of the circular is Aug. 1, 2024.
  • IND SEBI explained that, for QSB, this is irrespective of the number of UCCs.
  • Stock exchanges shall bring the provisions of this circular to the notice of stock brokers and also disseminate same on their websites; amend bye-laws, rules and regulations.
  • Issue a joint notice clearly indicating the date of applicability to various stock brokers.
  • Notify the obligation/requirement on the stock brokers to follow the standards adopted by Broker’s Industry Standards Forum (the ISF), in consultation with IND SEBI.
  • Stock exchanges are also directed to communicate to IND SEBI, the status of the implementation of the provisions of this circular in their monthly development report.

Regulators IND SEBI
Entity Types B/D; Exch
Reference Cir SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2024/96, 7/4/2024; CP 2/7/2023; ESG
Functions Audit; Complaints; Compliance; C-Suite; Fraud; Legal; Market Conduct; Operations; Reporting; Risk; Trading
Countries India
Products Equity; Fixed Income; Securities; Stock Lending
Regions AP
Rule Type Final
Rule Date 2/7/2023
Effective Date 8/1/2024
Rule Id 162642
Linked to Rule :173169
Reg. Last Update 7/4/2024
Report Section International

Last substantive update on 07/09/2024