IFSC Market Infrastructure Institutions Regulations

International Financial Services Centres Authority (Market Infrastructure Institutions) Regulations, 2021

• These regulations, amended up to November 1, 2024, are made by the International Financial Services Centres Authority.
• The regulations are in exercise of powers from the International Financial Services Centres Authority Act, 2019; Securities Contracts (Regulation) Act, 1956; and Depositories Act, 1996.

Preliminary

• These regulations are called the International Financial Services Centres Authority (Market Infrastructure Institutions) Regulations, 2021.
• They come into force on the thirtieth day after publication in the Official Gazette.

Definitions

• "Associate" includes someone who controls, holds 20%+ voting power, is a holding/subsidiary company, a relative, a Hindu Undivided Family member, or is deemed an associate by the Authority based on control, independence, or conflict of interest.
• "Authority" means the International Financial Services Centres Authority established under section 4(1) of the IFSCA Act.
• "Clearing corporation" means an entity established to clear and settle trades in securities or permitted financial products, including a clearing house.
• "Clearing member" means someone with clearing rights in a recognised clearing corporation.
• "Depositories Act" refers to the Depositories Act, 1996.
• "Foreign Jurisdiction" means a country other than India, with a securities market regulator that is a signatory to IOSCO's Multilateral MOU or has a bilateral MOU with the Authority, and is not identified by FATF as having AML/CFT deficiencies.
• "Governing board" means the board of directors of a recognised stock exchange, clearing corporation, or depository.
• "IFSCA Act" means the International Financial Services Centres Authority Act, 2019.
• "International Financial Services Centre" or "IFSC" has the meaning assigned under section 3(1)(g) of the IFSCA Act.
• "Key management personnel" includes a managing director, executive director, head of a department or vertical reporting to the managing director or governing board, head of a core function, or anyone in a key decision-making role identified by the governing board.
• "Netting" means a clearing corporation's determination of net payment or delivery obligations by setting off inter-se obligations or claims arising from securities buying and selling, or on the insolvency/winding-up/liquidation of a clearing member or broker dealer.
• "Novation" means a clearing corporation interposing between parties of a trade to be a legal counterparty.
• "Non-independent director" means a director elected/nominated by shareholders who is not a broker dealer, clearing member, or depository participant.
• "Public interest director" means an independent director representing investors' interests in an IFSC securities market, without any conflicting associations.
• "Recognised clearing corporation" means a clearing corporation in an IFSC recognised by the Authority.
• "Recognised depository" means a depository in an IFSC recognised by the Authority.
• "Recognised market infrastructure institution" means a recognised stock exchange, clearing corporation, or depository.
• "Recognised stock exchange" means a stock exchange in an IFSC, recognised by the Authority.
• "Rules" means the Securities Contracts (Regulations) Rules, 1957.
• "SCRA" means the Securities Contracts (Regulation) Act, 1956.
• "SEBI" means the Securities and Exchange Board of India established under the Securities and Exchange Board of India Act, 1992.

Recognition- Application, Conduct and Withdrawal

• No person can organize a stock exchange, clearing corporation, or depository in an IFSC without recognition from the Authority.
• An IFSC market infrastructure institution must be incorporated in an IFSC and meet shareholding requirements.
• Applications for recognition must be submitted with the prescribed fee.
• Applications for stock exchanges or clearing corporations must include the memorandum of association, articles of association, bye-laws, and other SCRA documents.
• Depository recognition applications must include a copy of the depository's draft bye-laws.
• Conditions to be met when seeking recognition as a stock exchange or clearing corporation.
• Applicants must be companies limited by shares and demutualised.
• The applicant, directors, and shareholders must be fit and proper persons.
• Applicants must meet ownership, governance, and net worth requirements.
• Applicants must have the necessary financial capacity, expertise, and infrastructure.
• Additional conditions for stock exchanges to be recognised.
• Applicants must have the infrastructure for orderly trade execution.
• Applicants must have an online screen-based trading system.
• Applicants must have online surveillance capabilities for real-time market integrity monitoring.
• Applicants must have infrastructure to list securities or permitted financial products for trading.
• Applicants must have a network of broker dealers and facilities to regulate members.
• Connectivity with broker dealers and clearing corporations must be established.
• Applicants must have investor grievance redressal and arbitration mechanisms.
• Facilities must be available to share trade information in real time on at least two accessible networks.
• Adequate system capacity must be available with a business continuity plan and disaster recovery site.
• Sufficient qualified personnel must be employed.
• Applicants must meet other conditions specified by the Authority.
• Additional conditions to be met by clearing corporations.
• Applicants must have timely clearing and settlement infrastructure.
• Applicants must have adequate risk management mechanisms.
• Applicants must have a settlement procedure including netting, novation, and guarantee for trade settlements.
• Capacity must exist to establish a fund for guaranteeing trade settlements.
• Applicants must have a wide network of clearing members and facilities to admit and regulate them.
• Connectivity must be established with depositories, clearing banks, stock exchanges, and other clearing members.
• Applicants must have online systems for risk management, a business continuity plan, and a disaster recovery site.
• Sufficient qualified personnel must be employed.
• Applicants must have procedures for resolving disputes and redressing grievances in clearing and settlement.
• There must be an agreement with a depository and stock exchange for trade clearing and settlement.
• Applicants must meet other conditions specified by the Authority.
• Resources are needed for efficient/orderly depository functioning by applicants seeking recognition as depositories.
• The depository must satisfy net-worth standards.
• Bye-laws/legal documents must protect investors and align with the depository's goals.
• Automatic data processing systems are protected against unauthorized access, modification, or disclosure.
• The communication network is secure against unauthorized entry.
• Standard data transmission and encryption formats for electronic communications.
• Controlled and monitored physical/electronic access to premises, facilities, and networks.
• A detailed operations manual explaining all its functions and methods for information transmission.
• Procedures and facilities to protect records.
• Arrangements to maintain backup facilities.
• Arrangements including insurance for indemnifying beneficial owners from losses due to the depository or participant's actions.
• Other conditions specified by the Authority must be met.
• The Authority grants recognition after ensuring conditions are met, subject to suitable conditions.
• Recognised institutions must comply with Authority-imposed conditions, updated periodically.
• Recognition period is permanent or specified by the Authority (minimum one year).
• Recognised institutions must follow a Code of Conduct as specified.
• Regulatory fees must be paid as specified by the Authority.
• Renewal of recognition follows the same provisions as initial recognition.
• Recognition can be withdrawn after a hearing.
• Stock exchange/clearing corporation recognition is withdrawn as per SCRA section 5.
• Institutions must have a minimum net worth of USD 3 million.
• The Authority can prescribe higher net worth based on risk management.
• Institutions must submit audited net worth certificates annually by September 30.

Shareholding Requirements

• Shareholding must be conducted in a recognised stock exchange.
• A stock exchange in India or a Foreign Jurisdiction must maintain a minimum of 26% ownership capital.
• A joint venture of market infrastructure institutions should maintain a minimum of 51% ownership capital.
• Other entities in India, IFSC or Foreign Jurisdiction cannot hold over 25% of the equity share capital.
• Shareholding in a recognised clearing corporation must be at a minimum of 26%.
• A joint venture of market infrastructure institutions must have 51% of the paid- up equity share capital.

Monitoring, Disclosure and Approvals

• A mechanism must be inplace shareholding and compliance
• Shareholding patterns must be disclosed periodically to the authority.
• Market infrastructure institutions may list securities upon Authority approval.
• Directors, key management, and shareholders must always be fit and proper persons.
• For listed institutions, ensuring shareholders' fitness is on the acquirer.
• Acquirers of less than 5% are responsible for ensuring the institution's fit.
• Acquirers of 5%+ and the institution are responsible for ensuring their fit.
• A fit and proper person has a general reputation and integrity, including financial integrity, good reputation and character, and honesty.
• Disqualifications include convictions for moral turpitude, economic/securities offenses; pending recovery proceedings; winding-up orders; insolvency; restraining orders; unsound mind findings; financial unsoundness; being a wilful defaulter; or being a fugitive economic offender.
• Orders against institutions or shareholders do not affect operations unless expressly directed.
• Any equity shares/voting rights acquisitions need prior Authority approval.
• Institutions must verify the declarations regarding proper requirements by persons.

Governance of Market Infrastructure Institutions

• Market infrastructure institutions should follow the broader governance prescribed in the Principles for Financial Market Infrastructures regarding governance.
• Governing boards should include non-independent directors, public interest directors, and a managing director.
• Chairpersons are elected by the governing board from its public interest directors.
• Public interest directors must equal or exceed the number of non-independent directors.
• Managing directors are included in the non-independent directors category.
• Employees may be appointed to the board as non-independent directors.
• Nominees of broker dealers/clearing members in an IFSC cannot be on a stock exchange/clearing corporation's governing board.
• Nominees of depository participants cannot be on a recognised depository's governing board.
• Director appointments are subject to Authority approval.
• Public interest director terms are three years, extendable by another three years.
• Limits of three terms apply across institutions with an age limit of seventy five years, for public interest directors.
• Current public interest directors may continue until their terms expire.
• The appointment of a managing director will be for a term not exceeding five years.
• Post first term institutions conduct an evaluation for appointments
• Managing Directors may be appointed for 10 years, with a age limit of 65.
• Up to three Authority-appointed directors can join the board with the same status as others.
• Roles and responsibilities for the governing board must be defined.
• The governing board must review performance regularly, including Code of Conduct.

Conduct and Key Management

• Governing boards, directors, committee members, and key management personnel must adhere to a Code of Conduct.
• The Authority can take action against any failure to abide by rules/conduct, with opportunities to be heard.
• Recognised Market Infrastructure Institutions shall constitute a nomination committee as specified by The Authority.
• The nomination committee, shall determine the compensation of key management.
• the compensation policy shall have clawback arrangements.
• Compensation, and changes, must be reported to the Authority.
• Recognised institutions shall conduct functional and oversight committees.

Operations and Reporting

• Institutions must identify core/critical functions such as:
• Critical Operations with functions like Trading, Clearing, IT Infrastructure etc.
• Regulatory, Legal, Compliance, Risk and Grievance.
• Other areas like sales, marketing etc.
• The functions must be provided as specified.
• The institution must ring fence and protect vertical 2 from others.
• Stock exchanges must have a recognized clearing corporation for clearing and settlement based on agreement.
• A stock exchange must extend its arbitration mechanism, for claims from trades.

Regulations of institutions

• Recognised stock exchange or clearing units shall seek approval from The Authority.
• A stock exchange shall establish an Investor Education fund as specified by The Authority.
• Clearing units shall create a settlement fund for trading, with a test minimum of 1 million USD.
• Adequate fund shall be required meeting obligations.
• The clearing corporation shall test the corpus to ensure.
• The framework must be inter-alias (contibutions etc) of those operating.
• Trading limits shall be decided by recognised exchanges.
• However they cannot exceed 23 hours and 30 minutes.
• Market to Market losses must be secured during the hours.
• Exchanges need plans in place to have adequate risk systems in place.
• Management system, shall be robust by those in scope
• Risk Framework needs to follow IOSCO standards.
• Margin frameworks shall evolve with global practices.
• Clearing Corporations shall maintain capital.
• Liquidity tests shall ensure robustness.
• Accepted accounts in USD, IRD, FD and in other currencies.
• Cash and Equivilents must form half of the liquid assets at all times.
• Clearing corporations must be ring fenced.
• Organisations are to hold capital to orderly operate.
• Trading halts must be able to occur where necessary, in volatile situations or major announcements.
• Co Location by a stock exchange, needs to ensue integrity.
• Equal access must apply to units and participants of the facilities.
• Reports on the websites for Co- location must be updated quarterly to ensure standards
• Continuity plans, with disaster management must be in place for transactions.

Governance- Utilisation and Access

• Utilisation by recognized units, is in ordinance by the Authority's specifications.
• Activities with funding, needed authorization from the Authority.
• Investing, can be in ordinance by governing boards.
• Separate trading units can operate if authorized.
• Clearing corporations ensure no discrimination and equality for trading
• Frameworks must be readily provided and available.
• Equality is assured and transparent.
• Preserving the accounts of 8 years is standard for auditing.
• Account records will be standard with rules for those in market units.
• Clearing units will maintain trading and information for 8 years minimium.
• Governance and accounting standards are required.
• The regulation shall be conducted to provide the industry with information that they need.
• Governance and documentation will be required for those bodies.

Conduct and Obligation

• Clearing members are able to clear their dues.
• Winding down of corporate clearing operations will ensure the safety of members.
• A recognized corporate framework will ensure a safe transition.
• All securities definted in ICSCA can be held in de-matrilized form, making it easily accessible
• Clear rules for the agreement between depositors
• Systems and procedures must allow data.
• Authorities will have full autonomy of inspection of all connected and associated bodies.

Key Governance

• Means to maintain and communicate and connect.
• All data and documents must be secured.
• Measures and protection of the entities.
• Withdrawal by participants and the manner of their conduct.
• Systems must manage and have infrastructure in place.
• The data should have integrity and the means to use data in plans.
• Authorities must manage records and access on a fair manner, that do not limit access.
• Market infrastructure will implement a website in its nature of business.
• Market infrastructure must appoint a compliance officer.
• Chief Risk Officer shall be of high standard to manage and operate risk measures.
• Any of the subsidiaries.
• Any legal measure and assistance.
• Any data should be separated.
• The return reports should be specified by the legal authority.

Powers and Enforcement

• Power of contact and engagement.
• Legal and fair action.
• In order to assist and support the regulations.
• Authorities can put in standards and process.
• There should be procedures and structures for those in the industry.
• Implementation should be structured and regulated.
• The organization, will adhere to the ICSCA.
• Those with good faith will implement regulation and process.
• All parties must act with what is within reason and ordinance.
• The actions taken with fair and structured measures shall be taken into account.

Schedule requirements when operating.

• Infrastructure must be sound in practice in market areas
• Actions must be fair and conducted with the best interest of the market.
• All infrastructure should be operated with the intent of market stability, to which all shall follow
• Key management in those sectors, shall be structured and clearly defined
• Responsibilities of all, should be clearly communicated.
• Members should be in the markets for integrity, and should follow structures and guidelines.
• Market participation is important and beneficial for innovation and success.
• Market participation should come with compliance structures and regulations.