The International Financial Services Centres Authority (IFSCA) introduced the Market Infrastructure Institutions (Amendment) Regulations, 2024, which brought about significant updates to the regulatory framework governing market infrastructure institutions (MIIs) in India’s International Financial Services Centres (IFSCs). These amendments aim to strengthen the governance, operational integrity, and risk management protocols of MIIs, including stock exchanges, clearing corporations, and depositories. Here’s a breakdown of the key updates and their implications.
Key Amendments and Changes
Expanded Definition of Clearing Corporations: The amendment redefines “clearing corporation” as an entity responsible for clearing and settling trades in securities and other approved financial products. This broader definition includes clearing houses, thus ensuring that any institution involved in settlement activities in IFSCs falls under the regulatory purview of the IFSCA. This change aligns IFSC clearing corporations with global best practices in financial settlement infrastructure.
Key Management Personnel (KMP) Reclassification: Under the amended regulations, the definition of Key Management Personnel (KMP) has been expanded. KMP now includes individuals at various levels of responsibility, from managing directors and heads of core functions to key decision-makers, as outlined in the Companies Act, 2013. This comprehensive reclassification ensures that all critical personnel involved in significant decision-making are accountable under IFSCA’s regulatory framework.
Introduction of Non-Independent Directors: The amendment introduces the concept of “non-independent directors,” defining them as directors elected or nominated by shareholders who do not have direct affiliations with broker dealers, clearing members, depository participants, or their associates. This move aims to prevent conflicts of interest and reinforce impartial governance within the MIIs in IFSCs.
Code of Conduct for MIIs: A new Code of Conduct was introduced, which mandates MIIs to adhere to ethical and professional standards. This Code, detailed in Part-A of Schedule-I, focuses on ensuring that MIIs operate with integrity, transparency, and accountability, safeguarding the interests of all market participants.
Net Worth Clarifications: The regulations now specify the calculation of the net worth of recognized stock exchanges, depositories, and clearing corporations. For clearing corporations, net worth includes only “liquid assets,” such as cash, bank balances, fixed deposits, and government securities. This clarification enhances transparency and provides a standardized approach to evaluating financial stability within MIIs.
New Mandates for Directors and Committees: The amendment introduces restrictions on the eligibility of directors affiliated with brokers or clearing members, aiming to avoid potential conflicts of interest. Additionally, it allows the IFSCA to appoint up to three directors on an MII’s governing board, enhancing regulatory oversight. These changes foster a more impartial and effective governance structure.
Compensation and Committee Structuring: The amendments require MIIs to establish a Nomination and Remuneration Committee to oversee the compensation of KMPs, ensuring compensation policies align with performance and risk. These policies must include “malus and clawback” arrangements, promoting accountability among senior management. Additionally, MIIs must constitute functional and oversight committees, enhancing checks and balances within their operations.
Risk Management and Segregation of Functions: The amendment mandates MIIs to identify and segregate critical operations, compliance, risk management, and business development functions. This separation ensures that functions crucial to operational stability are protected from potential conflicts arising from business expansion activities.
Cybersecurity and Legal Risk Management: MIIs are now required to appoint a Chief Risk Officer, Chief Legal Officer, and Chief Information Security Officer, focusing on risk management, legal compliance, and cybersecurity. This ensures comprehensive coverage of potential vulnerabilities and adherence to global standards in these areas.
Extended Trading Hours and Dematerialization: The regulations now permit trading hours up to 23 hours and 30 minutes daily, with mandatory settlements. All securities under the Securities Contracts (Regulation) Act, along with other approved financial products, are now eligible for dematerialization, facilitating secure and streamlined transactions.
Conclusion
The IFSCA’s Market Infrastructure Institutions (Amendment) Regulations, 2024, are a robust effort to bring IFSCs in India on par with global financial hubs. By enhancing governance, risk management, and operational transparency within MIIs, these amendments create a secure and stable environment for financial transactions. This regulatory framework not only aligns IFSCs with international standards but also fosters confidence among global investors and stakeholders.
