Mumbai: To prevent instances of flash crashes on stock exchanges, SEBI Thursday came out with stringent norms that require bourses to ensure that brokers implement appropriate risk checks before executing a trade.
"... It has been decided to prescribe a framework of dynamic trade based price checks to prevent aberrant orders or uncontrolled trades," SEBI said in a circular.
The measures come more than two months after a massive 900-point flash-crash of the benchmark stock index Nifty, wiped out nearly Rs 10 lakh crore of investor wealth. The flash crash, that happened on October 5, had halted trading for about 15 minutes.
Among others, SEBI has directed stock exchanges not to execute orders exceeding Rs 10 crore in the normal market.
These orders include ones placed on stocks, Exchange Traded Funds (ETFs), Index Futures and Stock futures.
In addition, exchanges have to ensure that appropriate checks for value are implemented by the stock brokers based on the respective risk profile of their clients.
"These measures would be implemented in phases in order to ensure the Indian stock exchanges deploy latest technology while maintaining adequate controls," the circular said.
All the measures are to be implemented within one month of the issuance of circular.
SEBI has asked stock exchanges to ensure that brokers put in place a mechanism to limit the cumulative value of all unexecuted orders placed from their terminals at a certain threshold level.
"Stock exchanges shall enhance monitoring of the operating controls of the stock brokers to ensure implementation of the checks...," the regulator said.
In case stock brokers fail to comply with any of the checks that are in place, they would be liable for a "deterrent penalty" that would be imposed by the stock exchange.
The regulator has asked bourses to ensure that the stock brokers mandatorily put in place "risk-reduction mode". Under this, all unexecuted trades would be cancelled when 90 per cent of the stock broker's collateral available for adjustment against margins gets utilised.
Only orders with "Immediate or Cancel attribute" shall be permitted in this mode and all new orders shall be checked for sufficiency of margins, the circular noted.
"Stock exchanges may prescribe more stringent norms based on their assessment, if desired," SEBI said.
Regarding Dynamic Price Bands (earlier called Dummy Filters or Operating Range) SEBI has tightened the initial price threshold in place for them.
"Stock exchange shall set the dynamic price bands at 10 per cent of the previous closing price for stocks on which derivatives products are available, stocks included in indices on which derivatives products are available, index futures and stock futures," SEBI said.
SEBI has asked stock exchanges to frame suitable rules with mutual consultation for such relaxation of dynamic price bands and also intimate the market.
These measures have been decided after SEBI's consultations with the market participants, stock exchanges, SEBI's Risk Management Review Committee (RMRC) and Technical Advisory Committee (TAC). Global practices in this regard were also studied.
SEBI has asked stock exchanges to "take necessary steps to put in place systems for implementation of the circular, including necessary amendments to the relevant bye-laws, rules and regulations, within one month from the issuance of the circular and with at least one week advance notice to the market".