Frame new outsourcing policy: Sebi tells bourses
The Securities and Exchange Board of India (Sebi) directed stock exchanges and clearing corporations on Wednesday to prepare a framework for appointing third-party vendors.
The regulator also asked the so-called market infrastructure institutions not to outsource core and critical operations, such as trading information, infrastructure, and surveillance.
Industry players say the move will help in better risk management and safeguard the markets and investors from unforeseen risks. There have been instances in the past where the promoter of an exchange also acted as a service provider, creating a conflict-of-interest situation.
Though the markets regulator has allowed the exchanges and clearing corporations to outsource activities to associate or group companies, it asked for a clear demarcation of such dealings and an arm’s-length relationship.
Sebi has also allowed outsourcing of certain core activities to specialist vendors who are experts in their field. However, in all such cases, the responsibility and control shall wholly vests with the exchanges and clearing corporations.
Further, if the trading or clearing software is purchased from a vendor, then there must be an arrangement to keep the source code in escrow. The move will help the exchanges get access to the software code and go on with the business in an event of an issue with the vendor.
On the contractual terms with the vendors concerned, Sebi, it its circular, said the agreement should mention all the potential conflict and obligation of the contracting parties. “Each agreement should allow for renegotiation and renewal to enable the exchange to retain an appropriate level of control over the outsourcing and the right to intervene with appropriate measures to meet its legal and regulatory obligations.”
Besides, the exchanges and the clearing corporations will have to ensure third-party entities have proven high-delivery standards and expertise in the respective field. Also, Sebi has directed exchanges to follow the duediligence process, which includes checking parameters like track record, delivery standard, unique selling proposition and service standards.
Sebi has also prescribed strict termination procedure. According to the regulator, the outsourcing agreement should provide regulatory authority to access the records of the service provider. Further, Sebi wants that new guidelines also give a clear mention of audit of the outsourced activities.