BSE begins work on risk-based supervision of brokers

The new model, based on level of risks posed by a market entity, will help it better regulate the marketplace

Leading stock exchange BSE has initiated a process of putting in place a new risk-based model for supervision of market entities including brokers, taking forward a new model proposed by regulator Sebi in this regard.

The Securities and Exchange Board of India (Sebi) has decided to adopt this new supervision model, based on level of risks posed by a market entity, to help it better regulate the marketplace and strengthen its surveillance system.

"In order to implement the model, based on the Risk Assessment template formulated by SEBI and exchanges, BSE has initiated the process of developing the system.

"The system would comprise data generated by the Exchange as well as those provided by the members," the BSE said today, while adding that it will provide an electronic interface to the members to enable them submit the data, which will be collated and analysed by the exchange system.

The new model, derived from the global best practices, would follow four distinct steps - assessing the risk posed by a market entity, assigning 'risk and impact rating' to it, determining supervisory risk rating score and then adopting a suitable supervisory approach.

Various market entities would be divided broadly into four groups -- very low risk, low risk, medium risk and high risk -- and the quantum of surveillance and number of inspections would increase as per the risk level.

Risk and impact ratings would be assigned to each entity on a scale of 0-4, with zero rating being for those with completed absence of any risk parameters, and a score of four would indicate 'very high risk or very low compliance'.

The move would help the existing surveillance system take care of most of the smaller offences, so that the investigation resources are utilised more effectively to tackle serious violations in the market place.

The new model would follow four distinct steps -- assessing the risk posed by a market entity, assigning 'risk and impact rating' to it, determine the supervisory risk rating score and then adopt a suitable supervisory approach.

The overall risk profile of an entity would be decided by two factors -- business or activity specific risk and the impact risk arising out of default or failure.

The risk-based supervisory approach is being implemented in a phased manner.

Earlier in September, Chairman U K Sinha had told PTI that Sebi was working on this risk-based supervision model while becoming the first financial sector regulator in the country to have done a study of its own regulatory impact.

The Sebi chief had further said that specific metrics would be put in place to determine the risk that every firm poses to the system and based on which enforcement actions can also be initiated.