The International Advisory Board favours active involvement of regulatory authorities

The Securities and Exchange Board of India, on Monday, said its International Advisory Board (IAB) had favoured active involvement of regulatory authorities to check flash crash-like situations and a separate regulator for collective investment schemes.

Besides, the IAB has acknowledged the need for reviewing the capital adequacy norms for market entities to meet the “unknown and non-market risks” such as flash-crash, as per their trade volumes and number of clients.

In wide-ranging discussions during its second meeting over the week-end here, the IAB also suggested a separate code or set of guidelines for research analysts providing their services without any fee to safeguard the investors’ interest.

Indian stock market witnessed a flash crash in benchmark index Nifty last month, after erroneous trade orders entered by a broker led to about 900-point plunge within seconds and the markets had to be halted for about 15 minutes. SEBI said the IAB discussed the recent flash crash episodes witnessed globally and in India, while deliberating over the pros and cons of HFT/Algo (High Frequency Trade/Algorithmic) trading, efficiency of secondary markets and fairness to market participants.

The IAB acknowledged that nearly all financial markets across the globe had these issues, and the International Organisation of Securities Commissions (IOSCO) had been actively discussing ways in which regulators and exchanges should modify market structures to tackle these challenges. SEBI said the discussions were held on the effects of HFT on volatility and liquidity in markets, ability of HFT strategies to influence or manipulate markets, trade annulment policies and the need for pauses to respond to sudden movement in prices in order to reduce uncertainty.

On collective investment schemes, the IAB observed that the regulation of such schemes was not the primary objective of a securities market regulator and would require substantial resources.

It was also underlined that such schemes were often localised and there was a criminal enforcement angle attached to the regulation of such schemes. It was, therefore, suggested that State governments’ role is important for regulating these schemes, while the need for an independent and separate regulator with sufficient resources was also underlined.

The IAB discussed the issue relating to regulatory gap in respect of various unregulated collective investment schemes and money circulation schemes in India.

For mutual funds, it was underlined that there was a need for uniform tax treatment of retirement-related investments irrespective of the investment routes and a significant boost to the development of annuity industry in India.

SEBI had constituted the IAB in September, 2011, and its role is to guide the market regulator in its policy decisions through global experiences and emerging developments and challenges. The IAB meets twice in a year and its first meeting was held on January 27, 2012.

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