Crisis and opportunity

A default by an exchange — due to incapacity to make the payment in time,or in full — is an extreme failure of financial regulation. An exchange is not an ordinary company. Exchanges are critical financial infrastructure that are at the frontline of enforcing financial regulation. The exchange has a responsibility to see that no trading on its platform is illegal. It is required to monitor and investigate the trading activity of its members. If a trade is illegal,it is the responsibility of the exchange to stop it. The next level is the role of the regulator. If the regulator is not sure that the exchange is able to enforce regulation,that it is “fit and proper” to carry out the quasi-sovereign function,it is no less liable if it has given an exemption to the exchange. In this case,it was the job of the regulator,the FMC,to see that the NSEL does not run an illegal futures market. The role of the regulator needs to be investigated. It is important,therefore,to shift the investigation from the FMC to enforcement agencies such as the CBI and the Enforcement Directorate.

Most expert committees on finance have recommended that the system needs a unified regulator for markets to plug these holes. While regulators,as one might expect,fight to preserve their turf,the job of the government is to protect consumers by not allowing the present regulatory structure to continue which provides opportunities for unscrupulous operators to escape regulation. Harshad Mehta’s legacy was improved regulation through the SEBI and the NSE. Ketan Parekh is remembered for reforms in the BSE,for the end of badla,and for derivatives trading. The NSEL scam should provoke the merger of the FMC with the SEBI.