SEBI issues SOP for Market Infrastructure Institutions (MIIs) on technical glitches; failure to invite hefty financial disincentives; MD, CTOs to be under the purview

Securities and Exchange Board of India (SEBI) has issued a circular on Standard Operating Procedure (SOP) for handling of technical glitches by Market Infrastructure Institutions (MIIs). The circular was issued on 5 July. The Market Regulator has also laid down “financial disincentives” in the event of failure in handling the technical glitches.  

MIIs, which include stock exchanges, clearing corporations and depositories, are “systemically important institutions as they inter-alia, provide infrastructure necessary for the smooth and uninterrupted functioning of the securities market,” the market regulator said in its circular. 

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Sebi in its circular has defined 'Technical glitch' as any malfunction in the systems of an MII and will include malfunction in its hardware, software or any products or services provided by the MII.  

Sebi has directed MIIs to make disclosures regarding the incidents resulting in business disruption. The disclosures to be made are as follows:  

-- Information of technical glitch on immediate basis but not later than 2 hours from the time of occurrence of the glitch; provided that glitches of the nature of a disaster- as defined in SEBI Circular dated March 22, 2021 shall be reported immediately upon declaration of disaster.  

-- Preliminary report within 24 hours of the occurrence of the glitch. 

-- Comprehensive Root Cause Analysis (RCA) report and corrective action taken to address the technical glitch within 21 days of the incident. Such report shall be submitted to SEBI, after placing the same before the Standing Committee on Technology and the Governing Board of the MII and confirming compliance with their observations.  

-- RCA submitted by the MIIs should include exact cause of the technical glitch (including root cause from vendor(s), if applicable), exact duration of the technical glitch, chronology of events, list of business processes/systems and time for which they were impacted, recommendations of SCOT / Governing Board of MII, details of corrective/ preventive measures taken (or to be taken) by MII along with timelines and any other aspect relevant to the technical glitch.  

-- As part of the RCA, MIIs are required to demonstrate compliance with various requirements of this SOP.  

--The RCA shall include details regarding time of incident, time when operations were restored and in the event of a disaster, time when disaster was declared. 

Financial Disincentives 

• In case of delay in submission or submission of incomplete/inadequate RCA by an MII, a “financial disincentive” of Rs 100,000 per working day shall be paid by the MII for each working day of delay. 
• Number of working days during which failure continues (i.e. after expiry of the timeline specified by Sebi – Rs 2 lakh per working day for first 15 working days. For the next 15 days the financial disincentive will be Rs 3 lakh per working day in addition to Rs 2 lakh for first 15 days. 
• Beyond 30 working days it will be Rs 25 lakh in addition to the above two.    

Failure to declare disaster within stipulated timelines:  

- Financial disincentive on MII - 10 per cent of average of standalone net profit for previous two financial years or Rs 2 cr, whichever is higher 

- Financial disincentive on Managing Director (MD) and Chief Technology Officer (CTO) of MII separately - 10 per cent each of  their  annual  pay  (both fixed and variable components) for  the  financial  year  when  the  disaster occurred