Big relief to small brokers; SEBI revamps tech glitch framework, not applicable if clients are less than 10,000

Big relief to small brokers; SEBI revamps technical glitch framework, not applicable if clients are less than 10,000

• SEBI eases technical glitch compliance for brokers with under 10,000 clients
• 60% of smaller brokers excluded from technical glitch framework
• Reporting timeline for glitches extended from one hour to two hours

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Market regulator Securities and Exchange Board of India (SEBI) has overhauled its framework for handling ‘technical glitches’ in stock brokers’ electronic trading systems, significantly easing compliance requirements for a large section of intermediaries.

Under the revised framework, SEBI has streamlined the eligibility criteria, restricting its applicability to stock brokers with more than 10,000 registered clients. As a result, nearly 60 percent of brokers, primarily smaller entities, with limited business scale and lower technology dependence will move out of the technical glitch compliance framework, substantially reducing their regulatory burden. The SEBI circular stated, " The eligibility criteria has been streamlined to exclude smaller size stock brokers from the technical glitch framework to reduce overall compliance of such stock brokers."

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SEBI has also detailed key exemptions from the definition of reportable technical glitches. Glitches occurring outside a broker’s trading architecture, those that do not directly impact trading functionality, or those with negligible market impact have been excluded and will not be counted as technical glitches.

Like,  disruptions caused by global technology failures such as issues at cloud service providers or other global vendors leading to widespread outages; technology disruptions originating at market infrastructure institutions (MIIs); technical issues encountered during new trading account processing back-office system issues that do not impact client trading or settlement. Similarly, failures of payment gateway applications arising from technical issues at banks, payment aggregators or service providers; and technical issues in decision-support tools such as technical charts, profit and loss statements, and back-office reports will not be reportable glitches.

SEBI has also rationalised the financial disincentive structure, considering the nature of glitches, whether major or minor, the frequency of occurrences, and the newly introduced exemptions.  SEBI circular said, " The financial disincentive structure has been rationalised considering the exemptions, type of glitches (major or minor) and the frequency of the occurrences".

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The circular said the financial disincentive structure shall not apply in cases where a technical glitch affects only one of the two trading modes, either the mobile-based application or the web-based platform, while the other mode continues to function normally. It shall also not be applicable to technical glitches that are minor in nature or have a negligible impact on the seamless operations of the stock broker. Stock exchanges will issue detailed guidelines on this aspect in consultation with SEBI.

Additionally, reporting requirements have also been simplified. The regulator has extended the reporting timeline for glitches from one hour to two hours, as many times brokers have said it takes time to understand the real issue behind the malfunctions.

SEBI has also allowed consideration of trading holidays while submitting reports and consolidated reporting to a single Common Reporting Platform instead of multiple stock exchanges.

Further, technology-related compliance obligations have been rationalised based on brokers’ size and level of technology dependence. Requirements such as capacity planning and disaster recovery (DR) drills have been recalibrated to make them more cost-effective and proportionate.

Narinder Wadhwa, Co-Chair, SEBI Broker Industry Standards Forum noted, “Another constructive outcome of the continued SEBI–ISF engagement, contributing to improved ease of compliance and doing business”. He further added that one suggestion that could not be taken forward at this stage was the proposal to introduce a tolerance threshold for client impact. ISF had recommended that incidents impacting less than 5 percent of clients may be excluded from the definition of a technical glitch

Dhiraj Relli, MD & CEO of HDFC Securities called the new circular as a good step that helps ease the process of doing business a lot. He said, "The new circular is another step towards easing the business environment. Earlier reporting had to be done within an hour of the glitch, which was becoming very difficult. Now, the exact requirement has been relaxed to 2 hours". Furthermore, it narrows the definition of a technical glitch to trading hours and limits it to trading-related glitches, whereas previously it covered everything and anything".

Kamlesh Shah, MD, Share India Securites and former President of Association of National Exchanges Members of India (ANMI) says, " SEBI wants to see detailed oversight and accountability only where there is real potential for trading disruption, mis-risking, or investor harm, not for every minor blip in the tech stack".

Narinder Wadhwa, Co chair, SEBI Broker ISF says, “Another constructive outcome of the continued SEBI–ISF engagement, contributing to improved ease of compliance and doing business”. He further adds, one suggestion that could not be taken forward at this stage was the proposal to introduce a tolerance threshold for client impact. ISF had recommended that incidents impacting less than 5 percent of clients may be excluded from the definition of a technical glitch.

In the last few years, there has been criticism that due to higher compliance and regulatory burden, small broking firms are surrendering broking licences and finding it too difficult to survive. The issue was raised in the Brokers Industry Standards Forum, and representations were made to the regulator in this regard.

The revised framework is expected to reduce compliance costs, improve operational efficiency, and provide regulatory clarity, particularly for smaller stock brokers.