Regulatory framework for Execution Only Platforms(EOP) for facilitating transactions in direct plans of schemes of Mutual Funds

SEBI on June 13, 2023 has issued a Regulatory framework for Execution Only Platforms(EOP) for facilitating transactions in direct plans of schemes of Mutual Funds.

The framework provides that the Stock Exchanges shall enact appropriate framework for EOP segment wherein the following requirements shall not be applicable for Category 2 EOP:

1. Trading rules applicable for equity, equity derivative and other segments
2. Investor Protection Fund.
3. Rules applicable for clearing and settlement of trades relating to equity, equity derivative and other segments.
4. Pooling of client’s funds by Trading Member
5. Membership and other related requirements as a Self-Clearing Member (SCM) or requirement of Trading Member –Clearing Member agreement.
6. Risk management framework and settlement related polices applicable for equity, equity derivative and other segments where the Clearing Corporation provides novation and guarantee for settlement of trades.
7. Issuance of contract notes and issuance of funds &securities statement.

The Stock Exchanges desirous of providing an EOP segment are directed to:

1. Make necessary arrangements to their relevant bye-laws, rules and regulations for the implementation of the directions in this circular and provide status of implementation regarding the same to SEBI on a monthly basis;
2. Monitor the operations carried out by EOPs who have obtained membership under EOP segment.

The AMFI is directed to:

1. Make necessary amendments for the implementation of the directions in this circular and provide status of implementation regarding the same to SEBI on a monthly basis; and
2. Issue necessary guidelines for Category 1 EOP before the date of this circular coming into force.
3. Monitor the operations carried out by EOPs registered with AMFI.

Key aspects of the regulatory framework for EOP in mutual funds

Category 2 EOP Requirements:

1. Registration as a Stock Broker: Entities must obtain registration as a Stock Broker under the EOP segment of the Stock Exchanges in compliance with SEBI (Stock Brokers) Regulations, 1992.
2. Body Corporate: The entity must be a body corporate.
3. Agent of Investor: The entity must operate as an agent of the investor, utilizing the platforms provided by the Stock Exchanges.
4. Non-Aggregator of Direct Plans: The entity should not act as an aggregator of transactions in direct plans of schemes of Mutual Funds and should provide services directly to investors.

Eligibility Criteria:

1. Compliance Officer: The entity must appoint a compliance officer.
2. Qualified Key Managerial Personnel: The entity must appoint at least two qualified key managerial personnel with a minimum of three years of experience in the securities market. “Qualified” refers to possessing a professional qualification in finance, accountancy, law, engineering, company secretaryship, management, or a post-graduation in the Securities Market from a recognized institution.
3. Fit and Proper Person Criteria: The entity must fulfill the “fit and proper person” criteria as prescribed under Schedule II of the SEBI (Intermediaries) Regulations, 2008.
4. Base Net-worth: The entity must comply with the base net-worth requirement applicable for Trading Members specified under Schedule VI of SEBI (Stock Brokers) Regulations, 1992.

Onboarding and Integration:

1. KYC Requirements: Category 2 EOPs must comply with Know Your Client (KYC) requirements and verify the identity of investors by collecting necessary documents.
2. Access to KYC Data: Category 2 EOPs should have access to the KYC data of investors available with the KYC Registration Agencies (KRAs).
3. Rights and Obligation Document: Category 2 EOPs must ensure that investors sign a “Rights and Obligation” document specified by the Stock Exchanges before availing their services.

Rights and Obligations:

1. Agreement with AMCs: Category 1 EOPs must enter into agreements with Asset Management Companies (AMCs) defining their rights and obligations for EOP services. The entity should have an objective, fair, and transparent policy for providing execution services for AMCs’ products.
2. Agreement with Stock Exchanges: Category 2 EOPs must enter into necessary arrangements with the Stock Exchanges, clearly defining their rights and obligations regarding EOP services.

Transaction and Onboarding Fees:

1. Category 1 EOPs: The entity may levy a flat transaction fee, borne by AMCs, within the upper limit specified by AMFI (Association of Mutual Funds in India). Onboarding fees, if applicable, should also be borne by AMCs.
2. Category 2 EOPs: The entity may levy a flat transaction fee, borne by investors, within the upper limit specified by the Stock Exchanges. Onboarding fees, if applicable, should be borne by AMCs and/or investors.