NSE co-location: EY, ISB audits fail to cut ice with Sebi panel

The Securities and Exchange Board of India’s (Sebi’s) technical advisory committee is not satisfied with the forensic report findings submitted by the National Stock Exchange (NSE) on co-location, said a regulatory official.

According to him, Sebi’s expert panel is of the view that the report findings are not matching with the evidences gathered by them. The panel has submitted their views to the market watchdog and has called for an independent probe.

In November 2017, the NSE had submitted two separate audit reports to Sebi, prepared by EY and the Indian School of Business (ISB), Hyderabad, relating to the co-location matter. The NSE entrusted EY to carry out a forensic audit into cash markets, currency derivatives, and interest rate futures platforms. 

Committee for independent probe
 

March 2016: TAC submits its report, notes NSE has violated norms of fair access, allowing some brokers to benefit
 

October 2016: NSE appoints Deloitte to examine the allegation, as directed by Sebi
 

December 2016: Deloitte submits its report, finds fault in the co-location architecture
 

March 2017: NSE appoints EY to audit its cash, currency and derivatives segment; ISB is appointed to determine whether certain NSE brokers made any abnormal profits
 

August 2017: Sebi appoints EY, Deloitte to jointly probe brokers' role in the matter
 

November 2017: NSE submits EY, ISB reports to Sebi

ISB’s audit was to determine whether certain brokers made any undue profits by getting preferential access to the exchange’s platform. 

Sources say the audit report has not found any individual involvement or human fault in the case. The report ruled out collusion between the exchange and brokers. The audit also did not ascertain the said ill-gotten gains made by brokers or any sort of undue advantages made through the co-location server.
 

However, the report did find faults in the co-location architecture and said the unfair access was due to the lack of written policies on co-location. It further said the architecture was prone to manipulation but had not been exploited in the currency platform. 

Sources said EY had suggested the bourse to enhance the system to bring them on a par with global standards. The report also cited international case studies on how to protect the market integrity and ensure equal participation.

Based on the suggestions, the top bourse is looking to appoint a chief technology officer who will look into its technology and enhancement.
 

“We are working on several recommendations to ensure transparency and to avoid technical glitches,” said an exchange official.
 

Last year in July, the NSE had filed an application with Sebi to settle the case through a consent mechanism.

“Sebi has not responded to the proposal as yet. It has taken the cognisance of the expert panel suggestion and is awaiting its own audit report and probe finding, which has been going on simultaneously,” said the source cited above.

Earlier, the NSE had appointed Deloitte, which had named a few brokers who had profiteered with this facility. But the audit firm was not able to find any proof against any entities that allegedly made any monetary gains. This has prompted the regulator to do a separate auditing and ordered a joint forensic audit to establish collusion between the brokers and officials in the co-location controversy. 

Meanwhile, Sebi had served show-cause notices to the NSE and 14 of its current and former key management personnel for alleged irregularities at the co-location facility. 

The case relates to some brokers allegedly getting preferential access to the NSE servers through co-location facility, early login and access to the ‘dark fibre’, which can allow them a split-second faster access to data feed of the exchange. Even a split-second faster access can yield huge gains for a trader.