Mumbai, Dec. 13: Sebi today came out with stringent norms that require bourses to ensure that brokers implement appropriate risk checks before executing a trade to prevent flash crashes on stock exchanges.
“It has been decided to prescribe a framework of dynamic trade-based price checks to prevent aberrant orders or uncontrolled trades,” Sebi said in a circular.
The measures come more than two months after a massive 900-point flash-crash of the benchmark stock index Nifty wiped out nearly Rs 10 lakh crore of investor wealth. The flash crash that happened on October 5 had halted trading for about 15 minutes.
Among others, Sebi has directed stock exchanges not to execute orders exceeding Rs 10 crore in the normal market.
These orders include ones placed on stocks, exchange traded funds (ETFs), index futures and stock futures.
In addition, exchanges have to ensure that appropriate checks for value are implemented by the stock brokers based on the respective risk profile of their clients.
“These measures would be implemented in phases in order to ensure the Indian stock exchanges deploy latest technology while maintaining adequate controls,” the circular said.
All the measures are to be implemented within one month of the issuance of the circular.
Sebi has asked stock exchanges to ensure that brokers put in place a mechanism to limit the cumulative value of all unexecuted orders placed from their terminals at a certain threshold level.
“Stock exchanges shall enhance monitoring of the operating controls of the stock brokers to ensure implementation of the checks,” the regulator said.
In case, stock brokers fail to comply with any of the checks that are in place, they would be liable for a “deterrent penalty” that would be imposed by the stock exchange.
The regulator has asked bourses to ensure that the stock brokers mandatorily put in place “risk-reduction mode”. Under this, all unexecuted trades would be cancelled when 90 per cent of the stock broker’s collateral available for adjustment against margins get utilised.