The Securities and Exchange Board of India (“SEBI”) pursuant to its January 17, 2023 amendment of the SEBI (Stock Broker) Regulations, 1992 for designating certain stock brokers as qualified stock brokers (“QSB”), brought out a circular vide no. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/24 dated February 6, 2023 wherein it entails the parameters based on which a stock broker shall be designated as a QSB.
According to the circular, which comes into force from July 1, 2023, these parameters are as follows:
Based on these parameters, the stockbrokers shall be assigned a score and those with a score equal to or more than 5 (five), based on the aforementioned parameters, as on December 31, 2022 shall be classified as a QSB. The framework, which shall be calculated annually (financial year) may be further extended, to also include compliance score of the stock broker, its grievance redressal score and its proprietary trading volumes in the near future.
The circular also provides for the enhanced obligations that the QSBs shall be mandated to follow and how the Market Infrastructure Institutions (“MII”) shall monitor the QSBs.
The QSBs are required to possess a board of directors or analogous body, which shall have oversight of all incidents and/or vulnerabilities that may result in an impact on the functioning of the QSB. The governance structure of the QSB is also required to have committees of board of directors such as the audit committee (for listed QSBs), nomination and remuneration committee, risk management committee, information technology committee, cybersecurity committee and any other committee as may be required by SEBI, or analogous bodies thereto. These committees must be consulted when the QSB frames policies relating to the areas dealt with, by those committees. The QSB must also submit an annual report to the stock exchange detailing the observations by the committees or analogous bodies and correction actions taken by the QSBs pursuant thereto.
The QSBs must also have a comprehensive and clear risk management policy that provides for fraud risks, credit risks, market and legal risks, risks that crop up from processes relating to know your customer (KYC) and opening of accounts, operational and technology risks such as faulty systems causing erroneous execution of orders from client accounts.
The QSBs are also required to conduct surveillance of client behaviour by analyzing their trading patterns and detecting unusual behaviour and reporting the detections to stock exchanges, in order to prevent fraudulent activities from taking place in the market.
The QSBs are also required to upkeep an appropriate technical capacity and scalable infrastructure that can process double the peak transaction load encountered during the preceding half year. It must also put in place robust cyber security framework and processes and possess a dedicated team of security analysts including domain experts in fields of cyber security, network and data security. The QSB must also regularly carry out continuous assessment of the threat landscape that it faces and conduct penetration tests, every half-year.
The QSBs must also have a thorough business continuity plan in place, reviewed every half-year and shall have their systems audited half-yearly by a CERT-IN empanelled auditor who shall check the QSB for the prescribed cyber-security compliances. QSBs must also have investor service centers in cities wherein they have branches and also allow for engaging with clients and investor queries and complaints online.
A framework for orderly winding down of business should also be created by the QSBs, which provides enough notice to its clients and allows its clients to transfer to other stock brokers seamlessly in case it is forced to close its business for any reason whatsoever.
Once a stock broker is classified as a QSB, it shall be subjected to enhanced monitoring and may be made to provide additional submissions to MIIs/ SEBI. Stock exchanges are mandated to create a framework allowing for increased monitoring of QSBs and are required to carry out annual inspections of the QSBs.
Please find a copy of the circular, here.
This update has been contributed by Nidhi Arya (Partner) and Adhip Ray (Associate).
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