To safeguard capital markets from outside risks, markets regulator Sebi today issued a new set of guidelines to govern outsourcing by stock exchanges and clearing corporations.
The new guidelines will ensure exchanges and clearing corporations do not outsource their core and critical activities to third parties while they would need to put in place a robust system to monitor outsourced activities.
The market intermediaries need to ensure proper audit of the implementation of risk assessment and mitigation measures listed in the outsourcing policy document, the outsourcing agreement and the service-level agreements pertaining to IT systems, among other measures.
The exchanges and clearing corporations will have to take appropriate measures to determine that its service providers maintain emergency procedures and a plan for business continuity or disaster recovery, with periodic testing of back-up facilities.
"The core and critical activities of stock exchanges and clearing corporations shall not be outsourced," the Securities and Exchange Board of India (Sebi) said in a circular.
However, they may outsource activities to associate or group companies, provided there is a clear demarcation of such dealings with clear arm's-length relationship.
Major exchanges in the country -- the BSE and the National Stock Exchange -- have their own clearing corporation arms.
According to Sebi, certain core activities could be outsourced to specialist vendors who are experts in their field -- IT services, network services and IT security.
However, in all such cases, responsibility and control will wholly vest with exchanges and clearing corporations.
Among critical activities of exchanges are core information technology (IT) support infrastructure and functions for running primary dealings; provision and daily operation of trading facilities and trading information disclosure excluding data feed distribution to third-party vendors.
Besides, management of the market functioning, including monitoring like online surveillance, investigation, price band relaxation are the other critical activities of the exchanges.
The exchanges and the clearing corporations will have to ensure entities having proven high delivery standards or expertise in the field are selected after a proper due diligence process, which may include parameters like track record, delivery standard, unique selling proposition and service standards.
Also, they need to ensure there is a legally binding written contract with the service provider. Besides, outsourced activities should be further outsourced downstream only with the prior consent of these market intermediaries and appropriate safeguards, including a proper legal agreement.
"The outsourcing arrangement should provide for the access by the regulatory authority of the records of service providers/outsourcing agencies and other information relating to the activities that are relevant to regulatory oversight," Sebi said.
These market intermediaries should include contractual provisions relating to the termination of the contract and appropriate exit strategies specifying events that may trigger termination of the service contract.
"Stock exchanges and clearing corporations shall maintain the capability and appropriate level of monitoring and control over outsourcing agencies, in order to be able to maintain continuity of business, even in the event of disruption or unexpected termination of the service," the regulator noted.
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