Sebi makes testing,audit of software tools must for brokers

As per the new guidelines,the stock exchanges have been asked to frame appropriate testing policies.

Written by PTI | Mumbai | Published: August 20, 2013 6:19 pm

To check stock market losses caused by technical glitches,Sebi today made it mandatory for the brokers and trades to get their trading systems and software tools tested and audited in consultation with bourses.

The capital markets regulator has also asked the stock exchanges to levy “deterrent penalties” in the form of fines or suspension to the concerned stock broker and traders in cases of any malfunctioning of software systems used by them.

“Various incidents of malfunctioning of software used by market participants have been observed in Indian as well as foreign securities market in the recent past.

“Such incidents have emphasized the need for a stringent and thorough testing of software before its introduction in the securities market. This applies equally to any subsequent changes to the software used by the stock brokers/trading members,” Sebi said in a circular.

The decision has been taken by Sebi pursuant to a consultative process with the stock exchanges,software vendors,system auditors and the regulator’s Technical Advisory Committee (TAC) to streamline and strengthen the process of testing of software.

Consequently,all market participants would have to follow a stringent testing procedure before deploying any software system or applications for connecting to the stock exchanges and for the purposes of trading and real-time risk management.

These would include systems like Internet Based Trading (IBT),Direct Market Access (DMA),Securities Trading using Wireless Technology (STWT),Smart Order Routing (SOR) and Algorithmic Trading (AT).

As per the new guidelines,the stock exchanges have been asked to frame appropriate testing policies for functional as well as technical testing of the software. The bourses would also organise mock trading sessions on regular basis,at least once in a month,to facilitate testing of new software or existing software that has undergone any change,in a close-to-real trading environment.

Besides,the brokers and traders would have to engage system auditors to examine reports of these tests to ensure a satisfactory compliance,Sebi said in its circular coming into effect from October 1.

The exchanges have been asked to monitor compliance of brokers and traders using algorithm trading and other systems. In cases where broker and traders are found to have failed to participate in mock trading sessions,stock exchange can call for reasons and suspend the proprietary trading rights of the concerned market entity,at least for a day.

The bourses have also been asked to ensure that system auditors examine the compliance of brokers and trading members and provide suitable comments in their system audit report.

If system audit report indicate any failure,the bourses can seek clarification and suspend trading rights of the concerned market entity.

Sebi further said market participants would need to engage a certified system auditor for period audit of their trading systems and software tools,while ensuring that engagement of such auditors do not pose any conflict of interest.

Brokers and trading members would also have to seek approval of the respective stock exchanges for deployment of any new software,after providing all necessary details including those related to the software,tests undertaken and report of the auditor. The exchanges can seek additional details for evaluating such applications.

Sebi has also asked the stock exchanges to provide relevant Application Programming Interface (API) specifications to all stock brokers and trading members desirous of developing their own software tools.

API enables interaction of software with other software and typically includes language and message format that is used by an application programme to communicate with the operating system or other application programme.

The exchanges have also been asked not to selectively release any updates or modifications to the existing API specifications.

In cases of malfunctioning of software used by market entities,exchanges can impose penalties like suspension of trading rights or fines for the concerned brokers and traders.

In addition,stock brokers and trading members would have to implement suitable mechanisms to minimize their losses in the event of software malfunction.

These can include clauses in their agreement with the software vendors to define liabilities of software vendor and suitable insurance cover to meet probable losses in case of software malfunction,Sebi said in in its new guidelines that would come into effect from October 1,2013.

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