Happy New Financial Year! Relief for brokers as regulator eases technical glitch norms

Happy New Financial Year! Relief for brokers as regulator eases technical glitch norms

Brokers have a reason to start the new financial year with a sigh of relief regarding technical glitch regulations. After extensive consultations with the Securities and Exchange Board of India (SEBI), exchanges have eased certain provisions related to technical glitches for brokers. Instances where brokers are not at fault but a technical glitch occurs will no longer attract financial penalties. Additionally, exchanges have introduced an upper limit on penalties for failure to disclose glitches. The new norms take effect from April 1.

According to a circular issued by exchanges on Friday, penalties will not be imposed in certain scenarios. These include back-office or operational issues that do not impact trades, glitches at the exchange, depository, or clearing corporation levels, and global issues with cloud service providers. Other exempted cases include issues in the KYC process for new clients, glitches during non-trading hours, and payment gateway failures caused by banks. Some feature-related failures, such as charts not displaying, news not being visible, or clients being unable to see suggestions, will also not attract financial penalties. However, all such incidents will still be classified as technical glitches, requiring brokers to report them and take corrective action if necessary. Failure to report or comply will result in penalties and other restrictions.

Brokers had requested that only incidents affecting the trading process be classified as technical glitches, but SEBI hasn’t agreed to this. Under SEBI’s definition, a technical glitch includes any malfunction in a broker’s systems—whether hardware, software, network, processes, or electronic services—for five minutes or more. This includes even slowdowns or deviations from normal system operations.

A source involved in framing the regulations said, “The message from the regulator is clear: brokers should not fear reporting incidents. Earlier, due to fear of penalties or business restrictions, brokers hesitated to report glitches. We want brokers to recognise the issue and take corrective action.”

SEBI and exchanges have also introduced other relief measures. The cumulative penalty for failing to report a technical glitch is now capped at Rs 5 lakh for large brokers and Rs 1 lakh for small brokers. Previously, the penalty was Rs 50,000 (fixed) plus Rs 25,000 per day until the failure was reported, with no upper limit. In many cases, brokers failed to report glitches due to ambiguity over whether an event qualified as a technical glitch. However, during inspections conducted weeks or months later, exchanges interpreted the event as a technical glitch, resulting in significant penalties. While the daily penalty structure of Rs 50,000 (fixed) plus Rs 25,000 per day for large brokers and Rs 20,000 (fixed) plus Rs 5,000 per day for small brokers remains, the overall cap of Rs 5 lakh and Rs 1 lakh provides relief.

Exchanges have also relaxed business restrictions. Under the new norms, brokers will not face onboarding restrictions if less than 5% of active users are affected, even if they experience more than five glitches in a financial year. Previously, brokers were restricted from onboarding new clients if they had more than five technical glitches in a financial year, regardless of the number or percentage of affected clients. For the first and second incidents of glitches, brokers will receive observation and warning letters. For large brokers, the penalty for the third incident and beyond starts at Rs 50,000 and increases by Rs 25,000 for each subsequent incident. For small brokers, the third incident attracts a Rs 20,000 penalty, with Rs 5,000 added for each subsequent case. In both cases, exchanges will evaluate the gravity of the situation before imposing further penalties.

A broking industry source noted, “Our request was to classify an event as a technical glitch only if 10% or more of active clients were impacted. The regulator may review this threshold in the future based on data and reporting trends, but not immediately.”

Some industry insiders argue that the primary goal of the review was to reduce reporting requirements for minor technical glitches. However, since reporting and compliance obligations remain under the new circular, they believe the relief is only partial.

“No broker wants reputational damage due to a technical glitch, but there are times when we have no control,” another industry source added.

Under SEBI norms, brokers must report an incident to exchanges immediately, or within a maximum period of one hour. A preliminary report must be submitted within one working day, followed by a root cause analysis report within 14 days. Exchanges then analyze the report, assess whether corrective actions align with expectations, and decide on further action.

SEBI introduced broad regulations in 2022 after a working group recommended measures to address rising instances of technical glitches in brokers’ systems. Subsequently, exchanges were directed to implement the Investor Risk Reduction Access platform, allowing investors to square off or exit positions directly through an exchange-provided platform in case of a broker-side technical glitch.