Sebi issues showcause notices to top NSE staff

Mumbai: The Securities and Exchange Board of India (Sebi) has sent showcause notices to top employees of the National Stock Exchange (NSE) in connection with the glitch that halted trading on February 24, said people with direct knowledge of the matter. This is the first time the capital market regulator has held exchange employees personally liable for trade disruptions.

The notices have been issued for violating Sebi’s stock exchange regulations, including deficiencies in “orderly execution of trades” and for not having adequate surveillance systems in place to “ensure market integrity.” Sebi is also probing the role of NSE at the institutional level separately, the people cited above added.

Sebi and NSE didn’t respond to queries.

On February 24, trading on NSE-India’s largest exchange – came to a standstill due to connectivity issues experienced by telecom providers. Some of the backup systems at NSE did not function, resulting in the exchange shutting for more than four hours.

The regulator also inquired into why the NSE management didn’t shift to the disaster recovery site within the specified time and instead chose to shut the exchange, said people cited above. In compliance with Sebi rules, NSE maintains a backup server in Chennai. In case of problems with the primary server in Mumbai, trades are to be routed through this backup server. However, on February 24, NSE took a call not to move to the backup server. This decision by NSE did not go down well with the government and Sebi, which felt emergency protocols were not followed, said the people cited above.

NSE Defended Employees

The disruption was caused by roadworks around Mumbai’s Bandra Kurla Complex (BKC), the area where NSE is headquartered. Civic workers had dug up the road for redevelopment, damaging underground telecom cables serving NSE. Once telecom connectivity to the primary server was hit, the storage area network (SAN), which connects various data servers across the exchange, also faltered, aggravating the problem.

NSE conducted an internal investigation and defended its employees on the grounds that technical glitches are “operational issues” and do not involve “corruption or misgovernance.”

“The glitch was undesirable, but employees cannot be held responsible for some roadwork over which NSE has no control,” said a person with direct knowledge of the matter. “We are hopeful that the NSE officials will be able to resolve the issue amicably with Sebi through the settlement process.”

According to a disclosure made by NSE, Sebi ordered the exchange to pay a “financial disincentive” of Rs 25 lakh in a July 2 letter. The exchange paid this on July 12.

The February 24 stoppage forced the regulator to tweak the standard operating procedure (SOP) during such incidents. Sebi issued a circular on March 22 making it mandatory for exchanges to shift to disaster recovery sites if the primary server doesn’t resume functioning within 45 minutes of a disruption. It also asked market institutions to carry out more stringent testing of disaster recovery sites to ensure that the shadow platforms are ready whenever the need for such a transition arises.

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