Regulatory Updates #27: SEBI on Algorithmic Trading, MCA on Masala Bonds & more

Bar & Bench will bring to you the latest regulatory and policy updates from different ministries and regulatory authorities. In this edition of the Bar & Bench Regulatory Updates, we analyse the latest updates by the Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs (MCA)..SEBI proposed new framework for algorithmic trading.SEBI has floated a discussion paper proposing measures that aim to tighten rules for algorithmic trading, which accounts for approximately 40% of the trades on the exchanges. The objective appears to be the levelling of playing field between those using High Frequency Trade (HFT) systems and regular market users..Algorithmic trading is a system of trading which facilitates transaction decision making in the financial markets using advanced mathematical tools. In this type of a system, the need for a human trader’s intervention is minimised and thus the decision making is very quick. This enables the system to take advantage of any profit making opportunities arising in the market much before a human trader can even spot them..HFT, carried out through dedicated algorithms, refers to the use of electronic systems that can potentially execute thousands of orders on the stock exchange in less than a second, which gives users an advantage over conventional traders..The discussion paper suggests as many as seven new rules to restrict algorithmic trading and HFT:.Proposing a minimum resting time mechanism, which will prohibit stock exchanges to amend or cancel orders before a specified amount of time i.e. 500 milliseconds;Addressing the problem of ‘latency advantage’, SEBI has introduced the mechanism of ‘frequent batch auction’ as opposed to the existing system of ‘continuous matching’. The mechanism of frequent batch auctions would accumulate buy and sell orders on the order book for a particular length of time (say 100 milliseconds), and orders received during the time interval will be matched in the end of such time period, ;Proposing speed bump mechanism which involves introduction of randomised order processing delay of few milliseconds to orders, to discourage latency advantage of the co-located players;Randomisation of orders received during a period (say 1-2 seconds). As per the mechanism, time-priority of the new/modified orders that would be received during predefined time period is randomised and the revised queue with a new time priority is then forwarded to the order matching engine;SEBI has also proposed maximum order message-to-trade ratio requirement. A maximum order-to-trade ratio requires a market participant to execute at least one trade for a set number of order messages sent to a trading venue. The mechanism is expected to increase the likelihood of a viewed quote being available to trade and reduce hyper-active order book participation;SEBI has also proposed separate queues for co-location orders and non-co-location orders. As per the mechanism, separate queues and order-validation mechanism would be maintained for co-location orders and non-co-location orders. Orders from queues will be taken up in the order-book in round-robin fashion;Another proposal under examination is to provide ‘Structured Data’ containing Top 20/ Top 30/Top 50 bids/asks, market depth, etc. to all the market participants at a prescribed time interval (or as real-time feed)..MCA & SEBI issue clarifications for Masala Bonds.The MCA has issued a circular dated 3 August 2016, which states that Indian companies issuing Rupee denominated bonds overseas (Masala Bonds) under the Reserve Bank of India’s policy on external commercial borrowings will not be required to comply with the public issue and private placement disclosure and listing noms under Chapter III of the Companies Act, 2013 as well as provisions governing issue of secured debentures under Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014..This clarification is issued owing to the confusion created over a circular issued in November 2014, which exempted ‘foreign currency bonds’ from the said provisions. However, Masala bonds and foreign currency bonds are different in terms of their denominations since Masala bonds are Rupee denominated..SEBI, too, issued a circular next day clarifying that such foreign investment in Masala Bonds will not be treated as investments by Foreign Portfolio Investors and will not fall within the purview of SEBI (FPI) Regulations, 2014..IBC is now partly effective .In order to strengthen the debt recovery process, the MCA has notified sections 188 to 194 of the Insolvency and Bankruptcy Code, 2016 which pertain to establishment and incorporation of the Insolvency and Bankruptcy Board (Board) as well as related rules. The board would have ten people including the chairperson. Apart from a secretary level officer, three experts from the field of finance, law, management, insolvency and related subjects would be part of the panel. They would be nominated by the government..In this regard, MCA had already sought applications for the post of chairman and three whole time members at the Board.