The Forward Markets Commission (FMC) plans to order a system audit
of all national exchanges under its watch. For this, it plans to hire external consultants to audit the advanced technology-based trading systems and other software to detect and weed out alleged malpractices by the exchanges’ promoters or managements.
“We have taken cognizance of complaints regarding illegal terminals or software. We are ordering a systems audit on all national exchanges, including MCX, to look into such malpractices,” a senior FMC
official told Business Standard.
A systems audit, or information technology (IT) audit, is an examination of management controls within the IT infrastructure. Experts say while a financial audit is aimed at evaluating whether an organisation is adhering to standard accounting practices, an IT audit checks the system’s internal control design and effectiveness. Auditors would check efficiency, security protocol, development processes and IT governance or oversight.
There have been investor complaints and media reports that a large commodity futures exchange had misused its IT systems for the benefit of its promoter. According to these reports, an illegal dummy terminal was trading on the exchange and eating away the profits of traders and genuine investors.
In response to an email sent last week seeking comment on the FMC move, an MCX
spokesperson said, “No comments”.
Currently, FMC doesn’t have enough manpower or technology to monitor or control such activity. While the Securities and Exchange Board of India has invested hundreds of crores in installing and maintaining an integrated market surveillance system that monitors every trade in shares and derivatives, such structures are yet to be established in the commodity futures markets. The traded turnover driven by technology-based systems and terminals stands at several thousand crores.
The systems audit being commissioned would provide valuable insight into loopholes in the infrastructure and suggest corrective steps.
MCX’s internal controls and IT systems had failed to detect or stop illegal trading by Indian Bullion Markets Association (IBMA). A forensic audit revealed about Rs 40,000 crore worth of trades were conducted by an entity belonging to arrested former National Spot Exchange Ltd chief Anjani Sinha’s wife, through IBMA.
The audit would also look into whether the people responsible for security had installed the necessary controls and implemented those effectively.
Sinha was taken to the group’s head quarters earlier this week to cross examine his claims of manipulated software that were put to use in NSEL.
Dipak Shah, head of market operations, MCX who was in charge of the surveillance function has been asked to leave by the exchange. Shreekant Javalgekar, MD & CEO, too had to resign.
The FMC- commissioned audit would also look into whether the people responsible for security installed the necessary controls and implemented these effectively. The audit would also look into if there was any breach in security and what actions can be done to prevent future breaches.
Regulator Gets Tech Savvy
Complaints have surfaced about existence of illegal terminals
Manipulated software used in bourses to benefit trades of promoters
Anjani Sinha also said to have reported manipulated software in NSEL
FMC to order systems audit to look into IT infrastructure
Systems audit to look for shortfalls, breaches and suggest corrective measures