Sebi circular builds up burden of responsibilities and obligations for QSBs

QSBs, besides being under the monitoring and supervision of SEBI, will also answer to stock exchanges.

The Securities and Exchange Board of India (Sebi) has released a circular detailing enhanced responsibilities and obligations that will now be incumbent on select stock brokers, who will be identified as Qualified Stock Brokers (QSBs).

A set of criteria has been defined by the market regulator which will determine if a stock broker will be deemed to be QSB or not. These parameters include the total number of active clients of the stockbroker, the available total assets of clients with the stockbroker, the trading volumes of the stockbroker (excluding the proprietary trading volume of the stockbroker) and the end-of-day margin obligations of all clients of a stockbroker (excluding the proprietary margin obligation of the stockbroker in all segments)

The circular prescribes a modality for calculating scores of stock brokers based on the said parameters, and any stock broker with a score equal to or greater than 5 will be identified as a QSB.

Reportedly, 16 stock brokers fall under the criteria of being QSBs.

Governance structure and processes for QSBs

QSBs shall have a Board of Directors or an analogous body, which shall exercise oversight over incidents/vulnerabilities having an impact on the functioning of the  QSB in the securities market and investor protection including data security breaches that can affect investor data.

The QSBs have also been mandated to have an audit committee (for listed QSBs), nomination and remuneration committee, risk management committee, information technology (IT) committee, cybersecurity committee and any other committee that Sebi may prescribe from time to time.

These QSBs will be required to submit an annual report to the stock exchanges regarding the observations of the committees of BOD or analogous body, corrective action taken by them and measures taken to prevent the recurrence of such incidents.

Risk management policy and processes

QSBs have also been directed to devise a clear and well-documented risk management policy which will deal with risks that arise during the KYC and account opening process, submission of fake information with an intention to commit fraud and non-updation of information submitted as and when there is any change in the information submitted during KYC. Additionally, the risk assessment policy will also have to deal with operational, technological as well as general risks such as fraud risk, credit risk, market risk, legal risk, reputation risk and risks due to outsourcing activities.

Surveillance of client behaviour

The risk assessment policy shall also deal with measures for carrying out surveillance of client behaviour by analysing the pattern of trading done by clients, detection of any unusual activity being done by such clients, reporting the same to stock exchanges and taking necessary measures to prevent any kind of fraudulent activity in the market.

QSBs, as per the circular, shall also carry out continuous assessments of the threat landscape faced by them and on half yearly basis, conduct vulnerability assessments to detect security vulnerabilities in their IT environments exposed to the internet.

Monitoring by stock exchanges

QSBs, besides being under the monitoring and supervision of SEBI, will also answer to stock exchanges.

Stock Exchanges, in consultation with SEBI, shall carry out an annual inspection of QSBs and communicate the findings of such inspection along with the action taken report to Sebi.

Stock  Exchanges shall devise a  comprehensive framework to carry out enhanced monitoring of such QSBs.