SEBI Probe Reveals Faulty Design and Low Capacity at the Exchange and, NCL

Remember the four-hour-long trading disruption at the National Stock Exchange (NSE) on 24 February 2021? Market regulator Securities Exchange of Board of India (SEBI), which was quick to give NSE a clean chit that day, has now found NSE had a faulty design in its critical trading infrastructure and lower than required capacity to handle the peak load. Further, according to the market regulator, NSE and NSE Clearing Ltd (NCL), which clears the trades on NSE, did not test and supervise the ‘failover logic’.

According to a report from The Hindu BusinessLinefew months ago, SEBI had issued a show-cause notice to NSE’s managing director and chief executive officer (CEO) Vikram Limaye, it’s chief for operations and technology Shiv Kumar Bhasin and NCL’s MD and CEO Vikram Kothari for a casual, lackadaisical and less -than-honest approach.

“NSE, NCL were completely aware that allowing trades without any risk management is a situation of disaster, born from their own decision to halt trading at 11.25am. There is no valid argument for trading without any risk management between 10.06am and 11.40am, ” SEBI says in the SCN, writes HBL.

The market regulator also refuted NSE’s arguments that it allowed trades sans risk management to avoid collateral damage, the newspaper says, adding, “SEBI said NSE and NCL management never gave serious thought to the option of moving at the disaster recovery (DR) site. Also, non-replication of data and inconsistency showed there was lack of preparedness of the systems.

Moreover, the management was not forthcoming in their replies to SEBI. The regulator was in the dark about the system’s failure at NSE and was informed about halting the market trading only at 11.30am.”

“Responsibility is always coterminous with power. MD and CEO at all points of time have to be responsible for all the decisions and acts of omission and commission by the exchange or any of its employees for the technology aspects. Same is applicable to the clearing corporation . Such lackadaisical and less than honest approach cannot be accepted,” SEBI was quoted in the report while charging NSE, NCL and its top management with violation of several rules.

A spokesperson of NSE told the newspaper that the SCN was received in August 2021 and extensive reviews on this matter have been conducted by various committees, and necessary actions have been taken. “NSE and NCL and management acted in good faith and the decisions and actions taken were bonafide decisions based on the facts and circumstances prevalent at the time of the incident and in the best interests of markets and investors. NSE and NCL have submitted a detailed response to SEBI on all aspects of this matter several months ago,” the report says quoting the spokesperson.

On 24 February 2021, NSE had to suspend trading for nearly four hours after a technical glitch affected the links from the telecom service providers. The glitch occurred as rates on NSE stopped updating at 10.08am, which led to the closure of the futures & options (F&O) segment by 11.40am and the cash market by 11.43am. It affected online risk management system, due to which market functioning had to be halted, NSE had said.

NSE informed that trading was halted at 11.40am due to ‘issues with the telecom service providers’ links. There was an issue with live ticks for NSE indices like Nifty 50, Nifty Bank, and others across brokers.

“NSE has multiple telecom links with two service providers to ensure redundancy and we have received communication from both the telecom service providers that there are issues with their links due to which there is an impact on NSE system,” a spokesperson from NSE had said.

“The trading halt continued till 3.30pm. In view of the exceptional situation arising out of the trading halt, it was decided to extend the trading hours to 5pm from 3.30pm at NSE, BSE and Metropolitan Stock Exchange of India Ltd (MSE), ” SEBI had said in a statement.

Next day, SEBI even claimed that its framework of interoperability worked on 24 February 2021 trading hald. It says its framework of interoperability “facilitated market participants to continue their transactions at other stock exchanges, thereby allowing them to seamlessly trade or square off their existing positions.”

“The same is evident from the fact that the trading turnover at BSE in equity segment jumped to Rs40,600 crore on 24th February as compared to an average daily trading turnover of about Rs5,200 crore during the previous 30 days,” SEBI added.

But there is a difference of opinion on whether the interoperability worked.

Recognizing the importance of business continuity, SEBI has asked market infrastructure institutions (MIIs) to carry out live trading from disaster recovery site for two consecutive days every six months apart from conducting quarterly disaster recovery drills.

The more significant issue for traders was that NSE closed its clearing corporation too. Consequently, 90% of the brokers who clear their trades through NCL could not place orders on BSE.

As we mentioned, it was precisely to prevent this from happening that market regulator SEBI had put in place a system of interoperability among the two clearing companies in November 2018. It had said that this was being done “for efficient allocation of capital for the market participants as well as provide better execution of trades.” (Read: NSE Shut for Trading: What Happened to Interoperability?)

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