SEBI Mandates Interoperability Among Exchanges to Handle Outages

The Securities and Exchange Board of India (SEBI) has introduced a framework for interoperability between stock exchanges to tackle trading disruptions caused by outages. This move aims to safeguard investor interests and ensure business continuity. Here’s a detailed explanation of what this framework entails.

What Is Interoperability?

Interoperability allows stock exchanges to act as backups for each other during system outages. For example, if one exchange like the National Stock Exchange (NSE) faces a disruption, the Bombay Stock Exchange (BSE) can serve as an alternative trading platform for market participants, and vice versa.

Key Highlights of SEBI’s Circular

1. Implementation Timeline
   The framework will take effect from April 1, 2025, giving exchanges time to set up infrastructure and systems.
2. Joint SOP Submission
   • SEBI has asked exchanges to create a Standard Operating Procedure (SOP).
   • The SOP must outline the process during an outage, including roles and responsibilities of the affected exchange and the alternative trading venue.
   • The SOP should be submitted to SEBI within 60 days of the circular.
3. Outage Protocol
   • If an exchange faces an outage, it must notify SEBI and the alternative trading venue within 75 minutes of the disruption.
   • The alternative trading venue must activate its business continuity plan within 15 minutes of receiving the notification.
4. Focus on Continuity for Exclusive Scrips
   For stocks exclusively listed on one exchange, reserve contracts will be created to ensure their continuity.
5. Handling Common Stocks and Derivatives
   • For common stocks, single-stock derivatives, and currency derivatives, investors can hedge positions using identical or correlated indices available on other exchanges.
   • Exchanges lacking highly correlated indices may introduce new index derivatives to facilitate smooth transitions.

Why Is This Necessary?

1. Market Disruptions
   Exchange outages can expose traders to risks like price fluctuations and order mismatches.
2. Investor Protection
   Interoperability reduces disruptions and ensures trading continuity, protecting retail and institutional investors.
3. Efficiency
   By allowing seamless hedging of positions and release of margins, the framework minimizes financial impact during outages.

How It Works in Practice

• If the NSE experiences a technical failure, traders can move to the BSE to continue their operations.
• Clearing corporations will facilitate the smooth transition of trades between exchanges, ensuring no loss of open positions.
• Margins for open positions will be released once offsetting positions are created on the alternative exchange.

My Opinion

This is a positive step by SEBI to enhance market resilience. In an era of increasing reliance on technology, outages are inevitable. Interoperability ensures that trading activity continues uninterrupted, reducing panic among investors. However, for this to succeed, exchanges must invest in robust technology and infrastructure. Close collaboration between exchanges and clearing corporations will be crucial.

Conclusion

SEBI’s move to mandate interoperability is a proactive measure to address potential disruptions in India’s financial markets. By ensuring that exchanges can act as backups for one another, SEBI aims to maintain investor confidence and market stability. This framework not only strengthens the operational robustness of exchanges but also prepares the market for any unforeseen technical challenges.