Sebi enhances vigil on MCX technology transition; Madras High Court issues notices

As top commodity exchange MCX races against time to move its trading technology from erstwhile promoter 63 Moons, regulator Sebi is keeping a close vigil on mock trading sessions and the transition process.

In the meantime, the matter has reached Madras High Court with an investors group seeking a detailed probe by Sebi (Securities and Exchange Board of India) into the exchange with regard to the "integrity and competence of the market software technology" to be adopted by MCX.

While Sebi has sought for weeks' time to file a counter affidavit, the court on December 8 also issued notices to MCX, MCX Clearing Corporation as well as their CEOs and Chief Technology Officers.

On condition of anonymity due to the matter being sub-judice and under regulatory scanner, top officials said some mock trading sessions have serious issues, but MCX did not reply to queries from PTI in this regard.

Top officials further said the regulator is closely watching the results of every mock trading session and also on the new technology transition plan, which has already gone through multiple changes.

MCX did not reply to queries on regulatory intervention as well.

The software support and maintenance agreement between 63 Moons and MCX, which was last amended on September 27, 2014, ended on September 30, 2022, but it was extended at the last moment for a period of three months and will be in force till December 31, 2022.

The technology support for MCX has always been provided so far by 63 Moons, which was earlier known as Financial Technologies India Ltd and was its erstwhile founder-promoter.

However, Tata Consultancy Services (TCS) was selected as the vendor for the development of the new commodity derivative platform in February 2021.

Although the new platform was to go live by July 2022, it got delayed and was first revised to go live after September 2022, though that deadline also could not be met.

In its latest annual report, MCX cited "complexity in platform development and integration" as a reason for the delay.

The possible options listed in the report included maximum six-month extension to the 63 Moons contract; or operation of existing system by in-house IT team.

"We are keenly working towards managing the situation and have also kept Sebi informed of the developments related to the migration to the new technology platform. However, in the event that none of the options are found viable, the risk quotient of the Exchange's operations may go up till the new platform is fully implemented," MCX said.

The exchange commands a huge monopoly, though its commodity futures market share declined in 2021-22 from over 96 per cent to nearly 93 per cent, while it also witnessed a trading volume plunge of 29 per cent to 14.49 crore lots.

During an investors' call on November 29, 2022, the exchange had said its objective was to go live with the new platform by December-end.

Officials said the exchange is mulling all possible options to ensure the continuity of its trading activities amid increased regulatory and judicial oversight on the matter.

The petition in Madras High Court was filed by Chennai Financial Markets & Accountability (CFMA), which sought Sebi's intervention to ensure that MCX and MCX Clearing Corporation have the necessary technical support for its technology from January 2023 onwards.

It alleged in the petition that the new technology platform has not been able to meet its deliverables and lack of any communication from the exchange was causing anxiety among investors and traders, as the contract with the existing vendor was expiring on December 31.

CFMA said it has also made a detailed representation to MCX and MCX Clearing Corp board members and had raised concerns on the lurking threat.

It further said MCX would be taking a suicidal step if it either runs on existing technology without support or transitions to new technology without having satisfaction about its stability and performance.

The technology of any exchange and clearing corporation is considered to be mission critical and even a minor glitch for a few minutes during the active trading session or malfunctioning of the risk management system or settlement schedule, could lead to chaos and heavy financial losses to the investing public, apart from the loss of reputation to the country, it added.

Millions of investors and traders across the country are said to be trading on MCX.

Besides MCX and MCX Clearing Corporation, the notices have been issued to MCX CEO P S Reddy and CTO Shashank Sathe as also MCX Clearing Corp CEO Narendra Ahlawat and CTO Anilkumar Varma.

The court ordered listing the matter after four weeks after Sebi's counsel accepted the notice and sought four weeks' time to file a counter-affidavit.