Sebi plans profiling of major investors to boost surveillance mechanism
This follows Sebi having put in place mechanisms for risk profiling of the brokers and listed companies so as to understand the associated risk.
The issue assumes significance as trading moves of some large investors can often have a 'bellwether-like' impact on the overall markets and therefore could pose systemic risks, a senior official said. This has become more important in cases of algorithmic or high-frequency trades, as the impact of the trading activities of major investors or traders could be quite big and really fast, requiring a very robust surveillance system, he added. As per a proposal being considered very actively by the Securities and Exchange Board of India (Sebi), the regulator's Integrated Surveillance Department would conduct profiling of major clients or investors in various segments to understand the pattern of their market participation and their impact. The proposed move would have a special emphasis on the algorithmic trade and High-Frequency Trading (HFT)s among others.
This will necessitate upgradation of resources for understanding and effective surveillance, specially for the algorithmic trades and the HFT activities. In this regard, special workshops have been conducted on HFT and algo trades for the officials from the surveillance department of the Sebi, while more such workshops or training programmes would be organised to enhance the understanding on the surveillance issues.
To help it better regulate the marketplace and strengthen its surveillance system, Sebi has adopted a supervision model based on risk levels for various market entities including brokers and mutual funds. Under the new model, various market entities are being divided into four groups -- very low risk, low risk, medium risk and high risk -- and the quantum of surveillance and number of inspections increase as per the risk level. This new supervision regime has been put in in place as per recommendations of an independent global consultant and the subsequent suggestions made by an internal Task Force at Sebi, while taking into account practices followed by many overseas regulators.
The move would help the existing surveillance system take care of most of the smaller offences, so that the investigation resources are utilised more effectively to tackle serious violations in the market place. The new model follows four distinct steps -- assessing the risk posed by a market entity, assigning 'risk and impact rating' to it, determine the supervisory risk rating score and then adopt a suitable supervisory approach. The overall risk profile of an entity is computed as a function of two components -- business or activity specific risk and the impact risk arising out of default or failure.
This supervisory approach based on risk levels is being implemented in a phased manner. Earlier last year September, Chairman U K Sinha had told PTI that Sebi was working on this risk-based supervision model while becoming the first financial sector regulator in the country to have done a study of its own regulatory impact.
The Sebi chief had further said that specific metrics will determine the risk that every firm poses to the system and based on which enforcement actions can also be initiated.