SEBI Probe Reveals Faulty Design and Low Capacity at Stock Exchange and, NCL

Do you remember the four-hour trading disruption at the National Stock Exchange (NSE) on February 24, 2021? Market regulator Securities Exchange of Board of India (SEBI), which was quick to deliver a clean boost to NSE that day, has now discovered that NSE has flawed design in its critical trading infrastructure and less capacity than required to handle the peak load. Furthermore, according to the market regulator, NSE and NSE Clearing Ltd (NCL), which clears trades on NSE, have not tested or supervised the “switching logic”.

According to a report by The Hindu Business Linea few months ago, SEBI issued a show cause notice to NSE Managing Director and Chief Executive Officer (CEO) Vikram Limaye, its Chief Operating and Technology Officer Shiv Kumar Bhasin and NCL Managing Director and CEO Vikram Kothari for a laid back, nonchalant and less than honest approach.

“NSE, NCL were fully aware that allowing trading without any risk management is a disaster situation, born out of their own decision to stop trading at 11:25 a.m. There is no valid argument for trading without any risk management between 10:06 a.m. and 11:40 a.m.,” SEBI says in the SCN, writes HBL.

The market regulator also refuted NSE’s arguments that it allowed trades without risk management to avoid collateral damage, the paper said, adding: “SEBI said that NSE and NCL management had never Seriously thought about the option of moving to the Disaster Recovery (DR) site. In addition, non-replication of data and inconsistency showed that there was a lack of systems readiness.

Additionally, management was unavailable in its responses to SEBI. The regulator was in the dark about the system failure at NSE and was not notified of the market halt to trading until 11:30 a.m.

“Responsibility always coincides with power. The Managing Director and the CEO must at all times be responsible for all decisions and acts of omission and commission of the exchange or any of its employees for technological aspects. It the same goes for the compensation company. Such a nonchalant and less than honest approach cannot be accepted,” SEBI said in the report while accusing NSE, NCL and its senior management of breaking several rules.

A spokesperson for NSE told the newspaper that the SCN was received in August 2021 and that extensive reviews on it had been conducted by various committees and necessary action had been taken. “NSE and NCL and management acted in good faith and the decisions and actions taken were good faith decisions based on the facts and circumstances prevailing at the time of the incident and in the best interests of the markets and investors. NSE and NCL submitted a detailed response to SEBI on all aspects of this matter several months ago,” the report quoted the spokesperson as saying.

On February 24, 2021, NSE had to suspend its activities for almost four hours after a technical problem affected the links of telecommunications service providers. The issue arose when rates on NSE stopped updating at 10:08 a.m., leading to the closure of the futures and options (F&O) segment at 11:40 a.m. and the spot market at 11:43 a.m. This affected the online risk management system, due to which the functioning of the market had to be interrupted, NSE said.

NSE informed that the exchanges had been interrupted at 11:40 am due to “problems with the links of the telecommunications service providers”. There was a problem with live ticks for NSE indices like Nifty 50, Nifty Bank and others among brokers.

“NSE has multiple telecom links with two service providers to provide redundancy and we have received communications from both telecom service providers indicating that there are issues with their links due to which there is an impact on the NSE system,” an NSE spokesperson said.

“The trading halt continued until 3:30 p.m. In view of the exceptional situation resulting from the trading halt, it has been decided to extend trading hours to 5:00 p.m. from 3:30 p.m. at NSE , BSE and Metropolitan Stock Exchange of India Ltd (MSE),,” SEBI said in a statement.

The next day, SEBI even claimed that its interoperability framework was working on February 24, 2021. It claims that its interoperability framework “has made it easier for market participants to continue trading on other exchanges, thereby enabling them to trade or seamlessly balance their existing positions”.

“The same is apparent from the fact that BSE’s trading turnover in the equity segment jumped to Rs 40,600 crore on Feb 24, from an average daily turnover of around Rs 5,200. crores of rupees in the previous 30 days,” SEBI added.

But there is a difference of opinion as to whether the interoperability worked.

Recognizing the importance of business continuity, SEBI has required Market Infrastructure Institutions (MIIs) to transact live from the disaster recovery site for two consecutive days every six months, in addition conduct quarterly disaster recovery exercises.

The bigger issue for traders was that NSE also shut down its clearing house. As a result, 90% of brokers who clear their trades through NCL could not place orders on BSE.

As we mentioned, it was precisely to prevent this from happening that the market regulator SEBI had set up a system of interoperability between the two clearing companies in November 2018. He had stated that this was done “for efficient capital allocation for market participants as well as better trade execution.” (Read: NSE closed for commerce: what happened to interoperability?)

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