Sebi to keep NSE’s consent plea on hold till forensic audit
Markets regulator Sebi will keep the National Stock Exchange of India’s (NSE) consent application on hold until after Deloitte Touche Tohmatsu India LLP and EY India complete a joint audit of the exchange’s high-frequency trading systems, two persons with direct knowledge of the matter said.
NSE in July sought a settlement with the Securities and Exchange Board of India (Sebi) over allegations that it had provided unfair access to its high-frequency trading systems to some brokers.
NSE applied to Sebi for a settlement through the so-called consent mechanism, which allows entities to settle charges by paying a penalty without admission or denial of guilt.
“Typically in situations where an investigation is pending, Sebi does not allow consent or settling the charges,” said one of the two persons cited above.
In September 2016, Sebi ordered NSE to conduct a forensic audit of its trading systems. Deloitte, the auditor appointed by NSE, found evidence of preferential access, but could not ascertain if anyone had made ill-gotten gains, and if there was any collusion by NSE officials. This prompted Sebi to order its own forensic audit—jointly by Deloitte and EY—which is currently under way.
According to the second of the two people cited above, Sebi will consider the consent petition only if the findings of the second audit are different from the first one. “Determination of whether the (findings of) two investigations are separate will happen only after the forensic audit is complete and Sebi has all the facts,” this person added.
An email sent to Sebi was not answered immediately. EY and Deloitte declined a comment.
A spokesman for NSE declined to comment.
On May 22, the markets regulator sent show-cause notices to the exchange and its 14 current and former officials over charges of providing some brokers unfair access to its algorithmic, or highfrequency, trading systems that allow thousands of orders to be executed in less than a second. Sebi said the exchange had failed in its fiduciary responsibility.
Sebi, in the last week of August, appointed EY and Deloitte India to conduct a joint audit.
According to Sumit Agrawal, partner, Suvan Law Advisors, Sebi does have the discretion to make an exception in some cases, where a consent applicant sets out adequate grounds for a settlement. In some other cases, “discretion is not envisaged in law till the process of fact-finding is complete,” he added. “In cases where there is a pending audit or investigation in respect of any alleged default, the regulator may find it difficult to consider any application for settlement.”
The auditors are expected to submit their report within the next 2-3 months, the first person cited above said.
The audit by Deloitte India and EY is aimed at determining if the traders who had unfair access to NSE’s trading algorithmic systems had made any illegal gains and if any NSE officials had colluded with them, the person said.
“The auditors were chosen based on their knowledge of NSE systems as they have just concluded one forensic audit each of the bourses systems. While Deloitte’s examination was of co-location facility and algorithmic platform, EY’s is of NSE currency and cash platform (and the audit) is yet to be concluded,” said the first person.
If the consent application is kept in abeyance while the probe is still underway, the NSE management and board may have to delay a planned IPO.