Sebi releases consultation paper on online bond trading platform

The Securities and Exchange Board of India (Sebi) has released a consultation paper on the bond market ecosystem in India. The market regulator has observed certain trends in the bond investment market and has now released a list of proposals which aims to benefit both the market and market participants.

Here’s what Sebi offered in his consultation paper.

Compulsory listing on the stock exchange: Sebi observed that bond platforms play “the role of facilitators, facilitating transactions for investors registered on their websites”.

Sebi has now proposed that “these bond platforms register as securities brokers (debt segment) with Sebi or be managed by brokers registered with Sebi. In addition, securities dealer regulation will be applicable to these entities, which will govern their code of conduct and other aspects related to their operations and risk management”.

Listed bonds only: Sebi observed that “listed and unlisted debt securities are offered on the same web page and/or under the same tab on the websites of these platforms. The listing status of debt securities is reported by bond platforms,” the consultation paper states.

Sebi now wants to modify the existing process by allowing only debt securities “offered for purchase/sale by online bond platforms to be only listed debt securities”, as investors should be able to “discern and make the distinction between the two,” the document said. .

Mandatory blocking for six months of privately placed securities: Sebi had analyzed market data of listed debt securities issued on the basis of a private placement during the financial year 2021-22 offered for sale by a few bond platforms and observed that in a few cases, the entire issue was sold to more than 200 investors within 15 days of the grant date.

Incidentally, under section 25 of the Companies Act 2013, privately placed securities cannot be placed with more than 200 people.

“Thus, if debt securities issued on a private placement basis are offered for sale by bond platforms to more than 200 investors, it would violate the provision of the Companies Act 2013,” Sebi said.

Sebi now wants to present a new proposal which states that “listed debt securities issued on the basis of a private placement, offered for sale on bond platforms will be blocked for a period of six months from the date of allocation of such debt securities by the issuer.

New channel for bond transactions: Sebi offers a new way of trading on online bond platforms. Sebi hopes to route them through the exchanges’ debt segment trading platform, as this will help mitigate the settlement risk associated with various online bond platforms, as in the case of exchanges, settlement is guaranteed on a T+2 base.

Sebi also offers another alternative route. Sebi said that “trades executed on online bond platforms may be routed through the exchanges’ RFQ platform, where trades will be cleared and settled on a delivery versus payment (DVP) basis. -1)”.

Using the exchange’s Application Protocol Interface (API) as back-end technology: Sebi said that API bond platforms can be designed to integrate with exchanges in the same way as brokers in securities build “their own front-end interface to facilitate the placing of orders”. by their clients, and trades are executed on Exchange trading platforms.

Sebi said this will help online bond platforms retain their current front-end web interface and also comply with changes to the backend (the exchange’s API). But in the front-end user interface, they will have to display the list of all available debt securities, their ratings, associated risk and any other necessary information.

What does Sebi hope to achieve with these proposals?

Sebi wants trades to be routed only through an exchange platform, as this will provide a “robust risk management framework and monitoring mechanism; fair and transparent pricing; guaranteed settlement; exit opportunity for investors; increase market making; and also provide a well-defined framework for the redress of investor grievances.

Sebi said the new proposals will be “beneficial to the market and market participants”, for a variety of reasons, including mandatory know-your-customer (KYC) registration, transaction stability and fairness.

KYC: Standard KYC requirements will apply when registering clients on bond platforms.

Stability: Net worth and deposit requirements prescribed for stockbrokers will ensure that the bond platform has a strong and stable financial health, according to the newspaper.

Justice: The applicability of the code of conduct imposed on securities brokers will ensure fairness in their dealings with clients. “They will be subject to regulatory inspection and oversight, giving investors more confidence and therefore have the potential to attract more investors,” Sebi said.

Ankit Gupta, founder of BondsIndia.com, a bond-buying platform, welcomed the move in a statement.

He said: “This is a welcome move, and it fits squarely with regulators’ focus on developing a transparent, robust and well-developed bond market for retail participation. This comes at a time when there has been a lot of proliferation in retail bond platforms, and investors could fall prey to a bad bond sell. There was a need to bring transparency and ease with the risk management protocols in place, and regulators ensured this.

Incidentally, Sebi has also asked the public to send their suggestions on this matter till August 12, 2022. Investors can send their suggestions to [email protected]; [email protected]; and [email protected] or by post to Pradeep Ramakrishnan, Managing Director, Department of Debt & Hybrid Securities Securities and Exchange Board of India, SEBI Bhavan, C4-A, G-Block, Bandra Kurla Complex, Bandra (East) , Mumbai – 400051.

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