How SEBI Protects Your Funds from Tech Glitches

Posted in Investment By Sajhyadri Chattopadhyay - Feb 23,2023
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In recent times, a slew of rapid developments in technology has improved the accessibility and ease of electronic trading in domestic stock exchanges. As the dependence on technology has increased in the securities market, the prevalence of glitches in the systems of its members has also gone up. Some of these have even led to the disruption of trading services. In such cases, open-position investors are left wide open to the risk of low to zero availability of avenues for closing their trading positions, mainly if the markets are acting volatile.  

To address these issues, SEBI consulted extensively with trading members (TMs), clearing corporations (CCs), and stock exchanges. It was found that often TMs’ business continuity plans would be unable to prevent this trading disruption in several cases. These instances range from them being unable to shift to a Disaster Recovery Site within the stipulated time to even cyberattacks. Thus, SEBI decided to bring in a contingency service for these domestic stock exchanges, in the face of such technical glitches.  

What is a Technical Glitch?

In simple terms, technical glitches are those issues in the software or hardware of a stock exchange, including its connectivity with brokers, that could hamper regular trading activities. This is of paramount importance as overall stock trading occurs electronically. Hence, a glitch could potentially affect lakhs of investors and cause crores of in investor wealth. Technical glitches can occur for various reasons. For example, a broker could face compatibility issues after a stock exchange updates its systems.  

A new security patch might also cause issues with server connectivity and affect trading systems. Sometimes, moving to a new trading software also leads to glitches. In today’s world, an expansive network of brokers is linked to security exchanges in India through satellites and server links. Any sort of malfunction in these links also causes a glitch. Hence, it is important to remember the deep-seated role of technology across exchanges and its risks.  

Preventive Steps Taken  

To protect traders and their market investments, SEBI has called for several important measures –  

Development of IRRA service:

The regulatory body has asked all domestic exchanges to set up a joint platform that will provide a service called the Investor Risk Reduction Access (IRRA). This will give investors the opportunity to close or square off their open positions and/or abort all pending orders in the event of any technical glitch. This will mitigate their losses from any disruption in trading services. This IRRA service will support multiple exchanges and segments under them. 

2. Enablement of the service:

When trading members or brokers face any technical glitch leading to service disruption, they can ask stock exchanges to enable the IRRA service according to the procedures mandated by the exchanges. The latter will enable IRRA for these traders when they send out such requests. Further, stock exchanges will also monitor various parameters like order flow, connectivity, etc. 

3. Open access to investors:

Once this service is enabled, the exchange will notify all investors under that trading member that they can avail the IRRA service via email/SMS. They will also put up a public notice on the exchange’s official website. Brokers will also display the same communique on their website. Investors can use the service by entering their PAN number or Unique Client Code (UCC), after which they will receive a One Time Password (OTP). Using this OTP, which will be sent to traders’ registered emails and mobile numbers, they will have authorisation to use IRRA. 

4. Actions under IRRA service:

Once successfully authorized, investors can close or square off their open positions across various market exchanges and segments. They can also cancel those orders which are pending with the exchanges across segments. Overall, the IRRA service will prevent any action which puts the investor or his finances at risk. Further, brokers will get access to an Admin Terminal from the IRRA service. Through this, they can monitor investors’ actions and also conduct the exchange-based actions mentioned above.   

5. Cyber monitoring of IRRA:

In case IRRA has to be enabled due to cyber-attacks, the trading members (brokers) accessing the Admin Terminal will shift to a secondary network than the one which was attacked. This will protect the critical infrastructure of the operational trading networks. In addition, stock exchanges will monitor social media posts and other parameters and initiate the IRRA service on its own, if needed.   

6. Other additional measures:

Security exchanges are also tasked with carrying out periodic and credible testing of the IRRA service from time to time. This will ensure smooth functioning of the protective service. Regarding this, stock exchanges will also issue specific guidelines, where they will provide key details such as the cut-off times for enabling IRRA, how various open position scenarios will be handled, reverse migration framework, etc. 

7. Administration by SEBI:

SEBI has mandated that exchanges extend the market trading hours if needed under specific scenarios. For example, the exchanges may consult SEBI and present their assessment if there are any disruptions in trading after the cut-off time leading up to the initiation of IRRA. Lastly, SEBI stated that all clearing corporations and stock exchanges shall establish numerous appropriate systems that will ensure that all parties comply with the IRRA service provisions latest by 1st October 2023.  

Going Forward

According to SEBI’s circular, it called for the setting up of the IRRA service to safeguard the interests of countrywide investors, in line with the exercise of its powers as per Section 11(1) of the Securities and Exchange Board of India Act, 1992. Moreover, this measure will lead to better development and regulation of Indian security markets. The regulatory body stipulated that trading members, i.e., stockbrokers will be responsible for all protective and pre-emptive IRRA activities.  

These obligatory actions include margin settlement and requirements. On the flipside, SEBI has also asked stock exchanges formulate a detailed framework for migrating back from the IRRA platform to the original trading systems when the technical glitch or security issue is resolved. This ensures unbiased authority distribution and multiple failsafe options to protect the integrity of the market. The reversal will depend on the broker’s size, migration time, and time remaining in the day’s trading session.  

Technical glitches have been becoming more common in domestic markets and exchanges in recent times. One of the major such incidents, seen on 24th February 2021, led to a complete halt in trading on the National Stock Exchange. Therefore, SEBI has a vital role in introducing such measures to make sure that these glitches and security issues become a rarity. At the end of the day, the correct implementation of these services and protocols will keep your, the investor’s money safe.  

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