Securities and Exchange Board of India (SEBI) has introduced measures to ensure seamless trading during technical outages, particularly in interoperable segments like equities, derivatives, and currency markets on stock exchanges. The new guidelines will strengthen the resilience of market infrastructure institutions (MIIs), such as stock exchanges, clearing corporations (CCs), and depositories, as the changes aim to ensure smooth operations, even during disruptions, the market regulator says.
Under these measures, SEBI says that participants can hedge their positions on another exchange during an outage for identical or correlated products- single stock derivatives and index derivatives. Margins for such positions will be netted off, it added.
The question of interoperability between exchanges was highlighted on 24 February 2021, when National Stock Exchange (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 closure of the futures & options (F&O) segment by 11.40am and cash market by 11.43am. It affected online risk management system, due to which market functioning had to be halted, NSE had said.
Next day, SEBI even claimed that its framework of interoperability worked on that day. It says its interoperability framework "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 24 February 2021 as compared to an average daily trading turnover of about Rs5,200 crore during the previous 30 days," SEBI added.
But there were differences of opinion on whether the interoperability worked.
The 24 February 2021 failure was on three fronts:
1) Interoperability between exchanges, which would have allowed trading to switch to the Bombay Stock Exchange (BSE) and prevented losses, did not happen because NSE Clearing Ltd was shut.
2) Standard protocols, with regard to re-opening markets, keeping market participants informed, providing enough notice and rolling back of trades to avoid losses to investors, were ignored.
3) NSE failed to switch to the disaster recovery (DR) site, which is reportedly tested every quarter under a SEBI mandate.
Days after finance minister (FM) Nirmala Sitharaman spoke about trading halt at the NSE and the ‘cost’ of such incidents for the financial markets, the ministry of finance (MoF) asked the market regulator to share its findings based on the root cause analysis that NSE was asked to submit within 21 days.
SEBI had asked NSE to explain its reasons for not migrating trading to its disaster recovery site. It had also asked for a detailed root cause analysis within 21 days from NSE on the 24th February trading halt. (
Read: NSE Trading Halt: Finance Ministry Asks SEBI to Share Its Findings on NSE’s Root Cause Analysis) One of the significant challenges in market continuity is dealing with outages during trading hours. When markets are disrupted, participants with open positions can face price risks due to fluctuating market conditions. Such outages can be financially damaging, especially if significant news breaks during the downtime.
A working group, made up of stock exchanges, clearing corporations, and qualified stock brokers (QSBs), was formed to develop solutions for outage management. As a result, SEBI proposed measures for interoperability in segments like cash, equity, currency, and interest rate derivatives. If similar products are available on other exchanges, participants can hedge their positions on those platforms. The interoperability allows for position netting and margin release, helping ensure continuity during outages.
In October 2023, SEBI released two master circulars outlining the framework for business continuity planning (BCP) and disaster recovery sites (DRS) for MIIs. The guidelines require MIIs to have adequate disaster recovery plans to reduce operational risks and maintain market continuity during crises.
SEBI also took steps in December 2023 to enhance risk management systems for clearing corporations by introducing a software-as-a-service (SaaS) model. This new directive will help make risk management infrastructure more scalable, adaptable, and resilient.
For stocks listed on only one exchange, as per the new framework, SEBI suggests creating reserve contracts for those scrips. These contracts can be invoked to facilitate trading on an alternative exchange in case of an outage. For index derivatives with no closely correlated counterparts on other exchanges, the affected exchange may create a new index and introduce derivatives contracts, allowing participants to hedge their positions, the market regulator says.
In the event of a disruption, the affected exchange must inform SEBI and the alternative trading venue within 75 minutes. The alternative exchange must then activate its business continuity plan within 15 minutes of receiving the notification.
To begin with, NSE and BSE have been designated as alternative venues for each other. Both exchanges are working together to establish a standard operating procedure (SOP) for outage management. This SOP will outline the steps to be taken, including roles and responsibilities of exchanges, clearing corporations, and brokers, to ensure continuity for investors, SEBI says.
SEBI’s guidelines also require stock exchanges and clearing corporations to implement the new provisions by updating their rules, bye-laws, and regulations. They must also inform their members about these requirements and regularly report the status of implementation to SEBI. These guidelines will take effect on 1 April 2025.
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