SEBI directions to NSE on Failure to implement circuit breaker at 10%, coordinated trading halt, adequate order/trade limit controls and risk management-Emkay Global

SEBI had, conducted a special purpose inspection of the National Stock Exchange of India Limited (NSE) to ascertain whether the said stock exchange is in compliance with the provisions of:

(a)    SEBI Circular dated June 28, 2001 related to Index based market wide circuit breaker in compulsory rolling settlement. As per the circular, with effect from July 02, 2001 an index based market wide circuit breaker system, was made applicable at three stages of the index movement either way at 10%, 15% and 20%. These circuit breakers were aimed to bring about a coordinated trading halt in all equity and equity derivative markets nationwide. (Read Circular Click Here >>)

(b)    SEBI Circular dated January 31, 2000 regarding mechanism of monitoring the risk management practices of its trading members

Pursuant to the said inspection and based on the findings of the inspection and submissions of NSE, SEBI had a Show Cause Notice (SCN) dated April 18, 2013 to the NSE and called upon it to show cause as to why appropriate directions under section 12A of the Securities Contracts (Regulation) Act, 1956 read with section 11 of the Securities and Exchange Board of India Act, 1992 should not be issued against it.

Allegations against NSE were as under:

That it failed to implement the market wide circuit breaker at 10% and allowed the Nifty to fall by 16% (920 points) and thereby contravened the SEBI Circular dated June 28, 2001.

The second allegation was that NSE failed to implement the co-ordinated trading halt in all equity and derivatives markets nationwide and re-opened the cash market with a pre-open phase at 10:00:22 and start of trading at 10:05:00 with only 15 minutes halt as against the halt of two hours, as mandated vide SEBI Circular dated June 28, 2001.

The third allegation against NSE was that it failed to ensure adequate Order/Trade Limit Controls and Risk management at its end and placed the onus entirely on the stock broker, Emkay Global.

The fourth allegation against NSE was that it failed to ensure adequate order/trade limit controls and risk management of counterparties of Emkay Global, in contravention of the SEBI Circular dated January 31, 2000.

Directions by SEBI dated 10-10-2014:
After the inspection and, considering all observations and findings, SEBI has issue the following directions to NSE:

(a)    NSE is censured for its conduct, as observed in this Order, and is directed to be careful and cautious in its dealings in the securities market and comply with all the legal requirements that govern its functions as a stock exchange.

(b)    NSE is directed to carry out a comprehensive review, by an Independent Expert ("the Consultant"), of the processes followed, checks in place, systems employed by NSE, not only in respect of the situation specific to this case but also for maintaining stability of markets in general. The Consultant shall suggest a more robust securities trading system and submit its Report within a period of three months from the date of this Order. On receipt of the Report of the Consultant, NSE shall, within a period of three months thereafter, submit a Report to SEBI along with its 'Plan of Action'.

Download Full Order Click Here >>