The Reserve Bank of India (“RBI”) issued the Electronic Trading Platforms (Reserve Bank) Directions, 2018 (“ETP Directions”) on October 5, 2018 with a view to regulate the financial system of the country and in exercise of the powers conferred on the RBI under the Reserve Bank of India Act, 1934 (“RBI Act”).

In terms of the ETP Directions, an “electronic trading platform” (“ETP”) means any electronic system, other than a recognised stock exchange, on which transactions in eligible instruments are contracted. The term “eligible instruments” has in turn been defined under the ETP Directions to include securities (of central government, a state government or such local authority as may be specified in this behalf by the central government), money market instruments (including repo, reverse repo, certificate of deposit, commercial usance bill, commercial paper and other debt instruments of original or initial maturity up to one year that the RBI may specify), foreign exchange instruments, derivatives and other instruments of like nature. It should be noted that “foreign exchange instruments” have not been defined under the ETP Directions or the RBI Act and the interpretation of this term may likely take colour from the meaning assigned to “foreign exchange” in the exchange control regulations.

The ETP Directions apply to “entities” (defined as an agency formed as a company and incorporated under Indian company law) which are operating ETPs to transact trade in “eligible instruments”. Such entities are required to obtain prior authorisation of the RBI for operating ETPs. ETPs existing and operating on or before the commencement of the ETP Directions were also required to make an application for authorisation within a period of six months from the date of the directions. ETPs authorised by the RBI are only permitted to host transactions in instruments approved by the RBI.

The ETP Directions include certain criteria which need to be met by the ETP operator in order to obtain authorization from the RBI, which include amongst other things, conditions as to its incorporation and management, financial criteria and technological requirements. One of the key conditions imposed under the ETP Directions is that the ETP operator should be a company incorporated in India and the existing entities operating ETPs, without being incorporated in India, are required to conform to the requirement of incorporation in India within a period of one year from the date of issue of authorisation by the RBI. However, this criterion does not apply to ETPs operated by scheduled commercial banks in India.

The ETP Directions also detail the operating framework to be adopted by ETPs which includes directions on various operational aspects including fair access and participation norms for members (including a robust due diligence of members and non-discriminatory information dissemination), risk management, disclosure of conflicts of interest, outsourcing, technology and information security, maintenance of data and records and reporting of information to regulatory authorities.

A specific exemption has been granted to electronic trading platforms operated by banks for their customers (acting as users) on a bilateral basis subject to the condition that such platforms do not extend direct or indirect access to market makers in any market for eligible instruments, which would include, for the purpose of foreign exchange transactions, authorized dealers.

One of the key questions that emerge from the ETP Directions is whether these directions would apply to offshore trading platforms which operate in markets outside India but enable Indian domiciled entities to participate on the platform to access offshore financial markets. The annual report of the RBI dated August 29, 2018, suggests that regulation of such offshore platforms may not have been the primary objective underlying the ETP Directions and indicates that the objective of the framework may have been “to improve transparency, reduce transaction time and cost, facilitate efficient audit trails, improve risk controls and enhance market monitoring in the financial markets regulated by the Reserve Bank”. However, in the absence of the ETP Directions providing any express exceptions in this regard, such offshore platform providers will need to evaluate their operational and business models closely to assess the implications of these directions on their operations in India or with Indian clients.

Author:
Hufriz Wadia, Partner
Amrita Sinha, Senior Associate