Sebi issues guidelines for system audit of professional clearing members

Markets regulator Sebi on Thursday put in place the framework for system audit of professional clearing members (PCMs), directing them to submit information with regard to major and minor non-compliances in such system.

The framework will come into force with immediate effect and the first audit will be conducted for FY24, Securities and Exchange Board of India (Sebi) said in a circular.

All clearing corporations (CCs) have been directed to jointly establish a uniform penalty structure for PCMs to ensure timely submission of system audit reports and closure of audit observations.

In its circular, Sebi said the audit of PCMs will be conducted according to the norms, terms of reference (TOR) and guidelines issued by Sebi or clearing corporations (CCs).

They will select the auditors based on the prescribed auditor selection norms and TOR and the governing board of the PCMs will approve the appointment of the auditors.

An auditor can perform a maximum of three successive audits.

However, such an auditor will be eligible for re-appointment after a cooling-off period of two years.

The regulator said PCM must maintain a list of relevant Sebi and CCs directions regarding technology and compliance.

They must report major and minor non-compliances found during the system audit and highlight any unresolved issues from current and previous audits.

The systems audit report, including compliance with Sebi/CCs guidelines and exceptional observation format, along with the compliance status of previous year's observations, must be reviewed by the PCM's governing board.

The report, with management comments, must be sent to CCs within one month of audit completion.

In October 2023, Sebi outlined the framework for system audit of stock brokers and trading members.