Explained | What are market infrastructure institutions?

What is the relevance of market infrastructure institutions for the economy? Why is regulation essential?

What is the relevance of market infrastructure institutions for the economy? Why is regulation essential?

The story so far: The National Stock Exchange (NSE), the country’s largest equity and derivatives exchange, was fined earlier this month for lax governance over actions taken during the tenure of its former chief executive and CEO. Chitra Ramkrishna. Markets regulator SEBI (Securities and Exchange Board of India) passed a 190-page order sanctioning the NSE, Ms Ramkrishna, her predecessor Ravi Narain and a former group operations director Anand Subramanian, whose appointment by Ms Ramkrishna was the main subject of investigation. , and imposed financial penalties on each of them. However, the regulator was also shocked that it had not acted quickly enough on complaints it had received against NSE management and on forensic audit reports which had revealed irregularities in the exercise. by Ms. Ramkrishna from her professional duties. In setting the context for its order, SEBI noted that the NSE was a systemically important market infrastructure (MII) institution.

What are IBD?

Exchanges, depositories and clearing houses are all market infrastructure institutions and form a key part of the country’s vital economic infrastructure. An expert group set up under the chairmanship of former RBI Governor Bimal Jalan – to examine issues arising from the ownership and governance of ITNs – said in its 2010 report: “The term ‘ infrastructure” would mean the underlying basic framework or features of a system; and the term “market infrastructure” means those fundamental facilities and systems serving that market. The primary objective of the securities/capital market is to enable the allocation/reallocation of capital/financial resources.” Such movement, he pointed out, contributed to the optimal use of money in the economy and promoted economic development. well-functioning, constitute “the core of (the) capital allocation system”, are indispensable for economic growth and have a net positive effect on society like any other infrastructure institution, the panel noted.

Why are they considered systemically important?

The systemic importance of ITNs in India is evident from the phenomenal growth of these institutions in terms of market capitalization of listed companies, capital raised and number of investor accounts with brokers and custodians and value of assets held. on the custodians’ account, as pointed out by the Jalan committee.

Unlike typical financial institutions, the number of exchanges, depositories and clearing houses in an economy is limited due to the nature of its business, although they cater to the entire market, the panel pointed out. . “Any failure of such an MII could lead to even greater cataclysmic meltdowns that could lead to an overall economic downfall that could potentially extend beyond the borders of the securities market and the country,” he said. observed.

Why are governance standards essential in IIM regulation?

Given the potential domino effect that an IRM failure could have on the market and wider economy, governance and oversight are absolutely essential and must be of the highest standards. Take the example of a technical glitch at the NSE early last year. Investors were unable to trade for about four hours. This prompted the finance minister to later say that the loss to the country had been “huge” due to the delay in resuming trading on the platform and that the switch to another platform should have been smooth. Market regulator SEBI then set standards stipulating time frames within which an exchange must take action in the event of a failure in its technology, including rules for failover to backup servers as part of disaster recovery in a institution that allows transactions amounting to thousands of crores of rupees per day. For context, the average daily turnover at the NSE in January this year was ₹64,178 crore.

Which specific institutions in India qualify as IRM?

Among the stock exchanges, SEBI lists seven including BSE, NSE, Multi Commodity Exchange of India and Metropolitan Stock Exchange of India. There are two depositories – in charge of the safekeeping of the securities and enabling their negotiation and transfer – which are labeled MII: Central Depository Services Ltd. and National Securities Depository Ltd.

The regulator also lists seven clearinghouses, including the Multi Commodity Exchange Clearing Corporation. Clearinghouses, on the other hand, help validate and finalize securities transactions and ensure that buyers and sellers meet their obligations.

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