Thursday, March 13, 2008

Hindu Businessline
Thursday, February 17, 2000

SEBI finalises rules for Internet-based trading

C. R. Sukumar


THE Securities and Exchange Board of India (SEBI) has finalised the conditions to be ensured by the stock exchanges for permitting their stock brokers to commence Internet-based trading.

These conditions pertain to operational integrity, system capacity, signature authentication, client-broker relationship, contract notes, trade confirmation, risk management, network security protocols and interface standards.

The regulator has asked the exchanges to make the necessary arrangements for early approvals of the Internet trading systems submitted by their member brokers for examination so as to avoid delay in commencement of Internet trading services.

Internet-based trading can take place through order routing systems which would route client orders to exchange trading systems for execution of trades on the existing stock exchanges. SEBI-registered stock brokers can introduce the service after obtaini ng permission from their respective exchanges.

The stock broker must have a minimum networth of Rs. 50 lakhs if he is providing the Internet-based trading facility on his own. In case some brokers collectively approach a service provider for providing the Internet trading facility, the networth crite ria as stipulated by the exchange would apply in terms of SEBI guidelines on networth.

Regarding the operational and system requirements, SEBI has directed the exchanges to ensure that the system used by the stock broker has provisions for security, reliability and confidentiality of data through use of encryption technology. The exchanges were also asked to ensure that records maintained in electronic form by the stock broker were not susceptible to manipulation.

SEBI preferred the participants to use authentication technologies and said it would be mandatory for the participants to use certification agencies as and when notified by the Government or the market regulator.

Keeping in view the risks involved in the Internet-based trading, the market regulator has asked the exchanges to ensure that brokers comply with all requirements of `know your client' and have sufficient, verifiable information about clients. The regula tor advised the stock brokers to provide information meant for investor protection on their Web sites and also provide and display prominently hyperlink to the Web site of the relevant stock exchange displaying rules, regulations and circulars.

The brokers were also asked to display the time stamps for ticker/quote/order book on the Web site. Apart from order/trade confirmation on real time basis on the Web site, the brokers were also asked to send confirmation to investors through e-mail at th e client's discretion. Further, the regulator asked the brokers to issue contract notes to clients as per the existing regulations within 24 hours of the trade's execution.

SEBI has asked the exchanges to set up separate cells specifically to handle Internet trading-related investor complaints. The regulator preferred the exchanges to have the facility for online registration of complaints on their Web site.

Further, SEBI has made it clear to brokers using Internet-based systems for routing client orders that they would not be allowed to cross trades of their clients with each other and that all the orders must be offered to the market for matching.

SEBI Guidelines - Internet Trading

SEBI Guidelines

According to SEBI guidelines on Internet trading, brokers providing e-trading must have a minimum net worth of Rs. 50 lakhs, besides obtaining specific permission of the stock exchange concerned. Stock exchanges should ensure that the systems used by the broker provide for security, reliability and confidentiality of data through use of the encryption technology. For signatures, participants should use authentication technologies and certification agencies as and when notified later.

Stock exchanges should also ensure that brokers maintain adequate back-up systems and data storage capacity. Brokers should have adequate system capacity for handling data transfer and arrange for alternate means of communication in case of Internet failure. The following security features are mandatory for all Internet-related trading systems:

*User ID.

*First level password.

*Automatic expiry of password at the end of reasonable duration.

*All transaction logs with proper audit facilities to be maintained in the system.

*Secured socket level security server for access through Internet.

*Suitable firewalls between trading set up directly connected to an exchange trading system and the internet trading set up.

SEBI has decided that Internet trading can take place in India within the existing legal framework through use of order routing systems, which will route orders from client to brokers, for trade execution on registered stock exchanges. SEBI has also recommended minimum technical standards for ensuring safety and security of transaction between clients and brokers which will be enforced by the respective stock-exchanges.

Tuesday, January 8, 2008