SEBI

Technical Glitches in Stock Broker’s Electronic Trading System: SEBI

The interests of the investor are paramount. Therefore, any inconvenience caused to the investor should be strictly resolute as early as possible. In order to ease the process of investing process, technological innovations are introduced in the securities market for efficient and effective management and buying & selling of securities by the investors. With technological innovation, the chances of technological interruptions and technical glitches are also at risk. Therefore, in order to solve this problem, the SEBI has constituted a working committee to provide suitable recommendations for addressing this issue. Based on the express views and recommendations of the working committee, the SEBI has decided to address the issue of Technical glitches in Stock Broker’s Electronic Trading System by way of issuing a circular on “Framework to address the technical glitches in Stock Broker’s Electronic Trading Systems” dated 25^th November 2022.

What Is The Definition Of A Technical Glitch?

As per the circular on Technical glitches in Stock Broker’s Electronic Trading System, the term “technical Glitch” could be understood as any malfunction in the systems of a Stock Broker, including malfunction in the software, hardware, network, processes and any other products & services offered by the stockbroker in the electronic format.

In addition to this, the technical glitches in Stock Broker’s Electronic trading system must also include any malfunction due to Inadequate infrastructure, Cyber- attacks, or incidents, Procedural errors, omissions or process failures in the system of a Stockbroker or in the systems which are sourced from the third party that lead to the stoppage, slow down and variance in the ordinary functions or operations or services of systems of the stock broker for a continuous period of 5 minutes or more.

What are the Reporting Requirements for Technical Glitches in the Stock Broker’s Electronic Trading System?

As per the circular on Technical glitches in Stock Broker’s Electronic Trading System, the stockbroker will undertake the following requirements for any technical glitches in the Stock Broker’s Electronic Trading System:

Inform the Stock Exchanges: The stock brokers shall immediately inform the stock exchanges about the incident of technical glitch by not later than 1 hour from the occurrence of such glitch.

Submission of Preliminary Report: The Stockbrokers shall submit a preliminary incident report to the Stock Exchange within T+ 1 day, T being the date of the incident. The report shall further contain the date & time of the incident, details of the incident, the effect of the incident and the action taken to rectify the said incident.

Submission of Root Cause Analysis: The stock broker shall submit a root cause analysis of the technical glitch to the exchange within 14 days from the incident date. The root cause analysis should contain the stockbroker’s name, exchange name and code, SEBI Registration Number, name and contact details of a designated officer or reporting officer, Date and time of the Incident, Duration of the Incident, Description of incident, impact on the business, Immediate action taken, date & time of recovery etc.

Communication of Information: The stock brokers have to submit the information stated above by mailing it to the E-mail address: infotechglitch@nse.co.

Examining reports by stock exchanges: Thestock exchange shall independently monitor the technical glitches and the report or RCA for appropriate action.

What Is A Capacity-Building System By Stockbrokers?

The increase in the number of investors may burden the stock broker’s electronic trading system. Therefore, the stockbroker must undertake adequate capacity planning for continuity in the service. The stock broker shall plan for the entire trading infrastructure, including server capabilities, network availability & the serving capacity of the trading applications. The stock brokers shall, in addition to undertaking capacity planning, also adhere to the following requirements:

Monitor Peak Load: The stock brokers must monitor the peak load in their trading applications, servers & network architecture. It shall be determined based on the highest peak load noted by the stock broker in a calendar year. Further, it is mandatory that the installed capacity must be at least 1.5 times the observed peak load.

Deploy adequate monitoring systems: The stock brokers shall put in place adequate monitoring systems within their networks & systems for the timely alert on the over-utilisation of the capacity if it goes beyond the permissible limit of 70 % of its installed capacity.

Achieve full Redundancy: The stock broker shall aim to achieve full redundancy in their IT system relating to the trading applications to ensure service continuity at the primary data centre.

What Is The Framework For Software Testing?

As per the circular on technical glitches in Stock Broker’s Electronic trading System, it is required that the software system of the stock brokers be rigorously tested before they are put to use in production systems since the software applications are subject to updates and changes. The software system can impact the functioning and therefore, the stockbroker must adopt the following framework for carrying out software-related activities and changes:

Adopt Test-Driven Environment: The stock brokers should create a test-driven environment for testing all types of software developed by them or their vendors.

Automated Environments: The software testing can be done in automated environments by specified stock brokers.

Preparation of Traceability Matrix: The stock broker should prepare a traceability matrix between functionalities and unit tests at the time of developing any software to be used in the trading activities.

Implement Change Management Process: The stock broker should adopt a change management process that will help avoid any risk that may arise due to unplanned and unauthorised changes in their software, hardware, network etc.

Periodical Updation:  The stock broker shall periodically update their assets, including servers, operating systems, databases, network devices and firewalls, IDS or IPS etc., with the latest version.

What is the monitoring framework for avoiding Technical glitches in Stock Broker’s Electronic Trading System?

In order to avoid any technical glitches in Stock Broker’s Electronic trading system, the stock brokers shall actively monitor the technical glitches to mitigate its impact. In this regard, the stock exchanges must build API based logging & Monitoring Mechanism (LAMA), which shall be operated between the stock exchanges and specified stock broker’s trading systems. In accordance with this mechanism, the Specified Stock Brokers should monitor the functional parameters & key systems to ensure that their trading system functions properly and smoothly. The stock exchanges shall undertake the following monitoring requirements:

1. The stock exchanges shall use the API gateway to monitor the key parameters to know the health of the trading system of specified stock brokers.
2. The stock exchanges must monitor key parameters in consultation with the stock brokers and shall monitored it on a real-time or near real-time basis.
3. The stock exchanges must maintain a dedicated cell for monitoring key parameters and technical glitches in Stock Broker’s Electronic trading system. Further, the dedicated cell immediately specifies the concerned stock broker about the key parameters’ breach.
4. The stock exchanges and stock brokers shall maintain a record of the key parameters for 30 days. Further, the data related to technical glitches shall be maintained for 2 years.

What Is Business Continuity Planning (BCP) And Disaster Recovery Site (DRS)?

As per the circular on Technical glitches in Stock Broker’s Electronic Trading System, the stock brokers are required to put in place a comprehensive BCP-DR policy which shall outline the standing operating procedure to be followed in the event of any disaster. A suitable framework shall be established to monitor the critical systems’ health and performance during the ordinary business course. The policy shall be reviewed periodically to determine the incident that may affect business continuity.

The other requirements for BCP-DR policy under the circular are:

Minimum Client Base: The stock brokers within the stock exchanges shall mandatorily establish a business continuity planning or DR set-up.

DRS to be set up in Different Seismic Zones:  The Disaster recovery site shall be established in different seismic zones, whereas, in the case of operational constraints, the chances of geographical separation are not possible. Therefore, the Primary Data Centre (PDS) and DRS shall be separately located from each other by a distance of at least 250 Km. to ensure that both centres are not affected by the natural Disaster. Moreover, the DRS site shall be made accessible to the Primary Data centre for syncing the data across two sites.

Conduct DR Drills or Live trading from the DR site: The stock brokers shall conduct DR drills or live trading from the DR site. The drills shall include conducting all operations from the DR site for at least one full trading day. Further, the frequency of such drills shall be decided by the stock exchanges in consultation with the stock brokers.

Shifting of operation from PDC to DR site: The stock broker shall appoint team members who will make decisions about shifting of operations from the primary site to the DR site, putting adequate resources at the DR site, & setting up mechanism to make DR site operable from the PDC etc.

Correspondence environment between PDC and DRS:  There shall be adequate resources in the hands of the stockbroker to handle the operations at PDC and DRS. The hardware and software systems of the application environment of DRS & PDC shall have correspondence between them.

Recovery Time objective (RTO) & Recovery Point objective (RPO):  The stock exchanges shall, in consultation with the stock broker, decide:

• Recovery Time objective (RTO): The RTO is the maximum time to be taken to restore operations from the DRS after the Disaster declaration.
• Recovery Point Objective (RPO): The RPO is the maximum tolerable period for which the data might be lost due to a significant incident.

High Availability, Right Sizing & No single Point failure: The replication architecture, bandwidth & load consideration between PDC and DRS shall be within the RTO and the whole system shall ensure right sizing, high availability & no single point failure. Also, any PDS update must be reflected immediately at the DRS.

Obtain ISO Certification: The specified stock brokers must obtain an ISO certification from the stock exchanges as may be specified by them from time to time if their operation and infrastructure are located in the IT-enabled area.

System auditor to check preparedness of stock broker in shifting operations: The system auditor is required to check the preparedness of the stock broker for shifting its operation from the PDC to DRS and further is required to document the DR drills conducted by the stock brokers.

What Are Financial Disincentives Provided Under The Circular?

The Financial Disincentives, in general words, mean penalties, fines etc. As per the circular on technical glitches in Stock Broker’s Electronic trading System, the stock exchanges can put in place financial disincentives which shall be applicable to the stock brokers for technical glitches in Stock Broker’s Electronic Trading System and further, it may be imposed if there is non-compliance of the provisions made in this regard.

What Are The Directions For The Dissemination Of Information?

As per the circular on technical glitches in Stock Broker’s Electronic trading Systems, the stock exchanges shall publish the information on their website on the instances of technical glitches in Stock Broker’s Electronic Trading Systems. They are further required to publish the information and the Root Cause Analysis of such glitches.

Conclusion

The rapid technological development has led the market institution dealing in securities trading to switch to electronic mode from conventional mode. With the development in the field of electronic media, there are associated risks which are also increasing. Henceforth, to provide a safe environment to the investor and prevent them from any unfortunate risks, the SEBI has provided a framework for reporting Technical glitches in Stock Broker’s Electronic Trading System. The said framework provides a comprehensive structure to the stock exchanges and stock brokers if there are instances of technical glitches in their trading system. Further, they are required to open a Disaster Recovery Site if in case the primary data centre is not operable due to any incident.

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