Sebi asks brokers to establish software system pool

Sebi today asked brokers to establish a 'software escrow arrangement' -- a pool of software systems and their vendors -- to avoid trading disruptions in case there is failure at the end of one entity.
The issue was discussed with Sebi's Technical Advisory Committee (TAC) which recommended that adequate mechanism should be in place to ensure smooth transition by broker to another software vendor in case of inability of the existing one to provide services in a timely and continuous manner.
"Any inability on the part of such software vendors to provide software or related services in timely and continuous manner may create a situation of stress in the securities market," Sebi said.

In a circular issued today, Sebi said that stock exchanges may advise brokers "to explore the possibility of establishing a 'software escrow arrangement' with their existing software vendors."
The regulator advised large stock brokers to reduce dependence on a single software vendor for trading and risk management systems by engaging more than one vendor.
Brokers have also been advised to include certain clauses in their contracts with the software vendor like penalty and access to documents pertaining to design and development specifications in case the vendor fails to provide service in a continuous and timely manner.

Also, there should be appropriate penalty clause for cases of disruptions to broker's trading system on account of software vendor fails to provide continuous and timely services and any glitch in the software provided by the vendor.

Besides, obligation on the part of the software vendor to cooperate in case of audit of software, including forensic audit, should also be part of the contract.
Sebi said that brokers should develop expertise at their end through appropriate training with regard to software usage and maintenance.
Software vendors provide computer programmes to market participants and market infrastructure institutions for the purpose of trading, risk management, clearing and settlement. They play a crucial role in the securities market.
The market watchdog, last year, made it mandatory for brokers and traders to get their trading systems and software tools tested and audited in consultation with bourses in order to check stock market losses caused by technical glitches.