Brokers may face joint-inspection by stock exchanges

To put in place a more effective system for monitoring brokers so as to check unfair trade practices and frauds, capital markets regulator Sebi is mulling over a proposal to allow stock exchanges to conduct 'joint inspection' of their members.
A concept note was earlier floated by leading bourse BSE for joint inspection of trading members by exchanges, clearing corporations and depositories, and it is now being considered by Sebi for possible implementation, sources said.
The proposal involves joint inspection of brokers, as also collection of data at a single platform by each and every exchange and other capital market infrastructure institutions such as clearing corporations and depositories.

Besides, offsite joint inspection could be conducted as per analysis of this data, while it has also been proposed that internal audit should be made more frequent.
The proposals are likely to face stiff resistance from brokers who claim to be already operating in a tightly regulated environment wherein supervisory functions are discharged by multi-level regulatory bodies such as stock exchanges, clearing corporations, depositories and Sebi.
In a representation to BSE, brokers have submitted that in the last few years stock broking has seen "a turbulent business environment leading to dwindling revenue and also exit of many trading members from the market".

The brokers are of the view that the proposed joint inspections would put further pressure on their resources, while they have already been raising concerns before Sebi with regard to multiple inspections of books of accounts and records being carried out by the stock Exchanges and others.

The new proposal for joint inspection by three exchanges (BSE, NSE and MCX-SX), however, has been made with a presumption that it will save time and cost of the trading member and the regulatory authorities.
Typically, the brokers are required to submit voluminous data prior to the inspection as per the questionnaire and as per the specific requirements of the exchanges and other front line regulators after submissions of certain details.

The brokers are also wary that collection of data by each exchange for sharing on one platform could lead to privacy issues. They have also requested Sebi to avoid onsite inspection, as far as possible, and conduct it only after giving sufficient advance notice.
Sources said that Sebi would take into account the submissions made by brokers before taking a final call, but the final decision would be made on the basis of overall integrity of the securities market.
Under the Sebi norms, the primary function of an exchange is facilitation of trading through electronic platforms, but it also regulates trading by enforcing trading rules and undertaking market surveillance.

The exchanges are also required to regulate trading members by undertaking periodic inspections and enforcement actions and they play a key role in investor protection by acting as a front line regulator.