Relevance of Market Infrastructure Institutions for economy and the need for their Regulation

Contact Counsellor

Relevance of Market Infrastructure Institutions for economy and the need for their Regulation

  • The National Stock Exchange (NSE) was fined for laxity in governance pertaining to actions taken during the tenure of its former MD and CEO
  • Markets regulator SEBI (Securities and Exchange Board of India) has passed a 190-page order sanctioning the NSE
  • However, the regulator too has come under a cloud for not acting quickly enough on the complaints it had received against the NSE management
  • SEBI noted that the NSE was a systemically important market infrastructure institution (MII) in setting the context for its order

About Market Infrastructure Institutions (MII)

  • The report of Bimal Jalan panel,2010 has defined it as fundamental facilities and systems serving the market
  • The well-functioning MIIs constitute the nucleus of the capital allocation system
  • Stock exchanges, depositories and clearing houses are Market Infrastructure Institutions
  • They constitute a key part of the nation's vital economic infrastructure.
  • These have a net positive effect on society like any other infrastructure institution

Reasons for considering them systemically important

  • Due to phenomenal growth of these institutions in terms of market capitalisation of listed companies
  • The capital raised by them
  • Growth of number of investor accounts with brokers and depositories
  • The value of assets held in the depositories’ account
  • The number of MIIs are limited but they cater to the entire marketplace
  • The failure of such an institute could lead to bigger cataclysmic collapses
  • It may result in an overall economic downfall that could potentially extend beyond the boundaries of the securities market and the country

Importance of governance norms in the regulation of MIIs

  • Domino effect: failure of an MII could have on the wider impact on market and economy, governance
  • Example: There was a technical glitch at the NSE early last year.
  • Investors were not able to trade for about four hours
  • Markets regulator SEBI later set out norms stipulating timelines within which an exchange has to take action if its technology fails
  • It includes rules for switchover to backup servers as part of the disaster recovery

Institutions that qualify as MIIs in India

  • Stock exchanges: SEBI has listed the BSE, the NSE, the Multi Commodity Exchange of India and the Metropolitan Stock Exchange of India as MIIs
  • Depositories: these are charged with the safekeeping of securities and enabling their trading and transfer
  • The Central Depository Services Ltd. and the National Securities Depository Ltd. are tagged as MIIs
  • Clearing houses: They help validate and finalise securities trades and ensure that both buyers and sellers honour their obligations.
  • Multi Commodity Exchange Clearing Corporation and six others are listed as MIIs in India