Regulator pads up to protect market from systemic risks

Amid signs of more global turmoil, capital market regulator Securities and Exchange Board of India (Sebi) has planned a dedicated unit to mitigate systemic risks for the stock market.

The proposed Systemic Stability Unit will assess risks emanating from the stock market, an agenda note for Sebi’s July 28 board meeting showed. It will also assist in offering inputs from Sebi to the Financial Sector Development Council in monitoring systemic risks in respect of the stock market and systemically important financial institutions.

Systemic risk is not limited to sudden catastrophic events. It can also take the form of a more gradual erosion of market trust caused by inadequate investor protection standards, lax enforcement, insufficient disclosure requirements, inadequate resolution regimes or other factors, the regulator said.
 

SEBI’S SAFETY NET

* To set up a dedicated unit for monitoring systemic risks

* Norms to prevent conflict of interest of associated persons 

* To regulate research analysts, hedge funds and PE investors

* To create an international advisory board to assess trends in global markets

“Systemic risk not only has the potential to harm a large number of investors and market participants, but it can also have a widespread negative effect on the overall economy,” Sebi said.

It is also setting up a business intelligence and data warehousing project to strengthen infrastructure for monitoring and identifying any abnormal trend in the market and take timely action to mitigate risks from any such abnormal patterns. It is putting in place a unified regulatory filing system for all listed companies and market entities in a standardised format.

To protect market integrity, Sebi plans to prescribe norms to prevent conflicts of interests of associated persons in the securities market. The regulator may also request the government to ensure that oversight of auditors be done by an authority independent of the audit profession and to set up a mechanism for enforcing compliance with auditing standards.

Sebi also plans to regulate research analysts and private pools of investments such as hedge funds and private equity investors. It wants to create an international advisory board, which will meet twice a year, to assess the trends in global markets. Recruiting a chief economist who would support the senior management with economic and policy research inputs is also on the anvil.

Sebi says it plans a discussion with international and domestic experts, including its past chairmen, to develop a medium and long-term direction.