Sebi revises norms for liquidity enhancement schemes

Exchanges can provide trading incentives for three years

Capital markets regulator Securities and Exchange Board of India (Sebi) has revised norms governing the incentive schemes that stock exchanges can provide members for trading on their platforms.

The new norms allow exchanges to provide incentives for a maximum of three years, according to a circular on the regulator’s website

"The stock exchanges shall introduce liquidity enhancement schemes on any security for a maximum period of three years. Once the scheme is discontinued, the scheme can be re-introduced on the same security provided it is less than the three year period since the introduction of scheme on that security," said the Sebi circular.

The norms are applicable for equity cash and equity derivatives. The circular also says exchanges will have to review the effectiveness of the scheme every six months and file half-yearly reports to Sebi. They will also have to disclose information on incentives granted and volume achieved, market-makerwise and securitywise.

The circular allows for incentive schemes across exchanges for the same security.

"...a stock exchange may introduce liquidity enhancement schemes in securities where liquidity enhancement scheme has been introduced in another stock exchange. Such schemes cannot be continued beyond the period of liquidity enhancement schemes of the initiating stock exchange," it said.

The norms also require the exchanges to put in place procedures to detect collusion among brokers trading among themselves for garnering incentives, and to prevent payments in such cases. Incentives can also take the form of warrants and options in the stock exchange itself, though this should be as per regulations governing stock exchange stakeholding and should not exceed 25 per cent of the exchange's outstanding shares.

"A conflict of interest framework shall be put in place by the stock exchange for the liquidity enhancement scheme. Such a framework shall provide for obligation on the part of the market maker / liquidity enhancer to disclose any conflict of interest while participating in the scheme," it added.