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Framework for Recognition of Self-Regulatory Organisations (SROs) in Financial Markets regulated by RBI

Reserve Bank of India (RBI) has released the framework for recognition of Self-Regulatory Organisations (SROs) in Financial Markets regulated by RBI.

What is the need of Self-Regulatory Organisations in Financial Markets regulated by RBI?

RBI is tasked with the regulation, development and oversight of (i) Interest rate markets, including the Government securities market; (ii) Money markets, including the market for repo in Government securities and corporate bonds; (iii) Foreign exchange markets; (iv) Derivatives on interest rates / prices, foreign exchange rates and credit. RBI is also responsible for the regulation of financial market infrastructure, including financial market benchmarks, for these markets. 

With the growth of the Regulated Entities (REs), in terms of number as well as scale of operations, increase in adoption of innovative technologies and enhanced customer outreach, a need is felt to develop better industry standards for self-regulation. Self-Regulatory Organisations (SROs) can play a vital role in this direction. SROs shall frame necessary best practices / standards / codes within the regulatory framework prescribed by RBI for voluntary adoption by its members and these shall not be a substitute to the prescribed regulatory framework. 

To whom shall the framework be applicable?

The framework shall be applicable to SROs in Financial Markets regulated by RBI.

What shall be the characteristics of SROs in Financial Markets regulated by RBI?

An SRO is expected to operate under the oversight of the regulator and should have the following characteristics –

  • Sufficient authority which is derived from membership agreements or Articles of Association to set ethical, professional and governance standards and enforce these standards on its members. 
  • Objective, well-defined and consultative processes to frame rules relating to conduct of its members. SROs should also put in place well-defined processes for overseeing activities of its members. It should establish clear standards of conduct and specify consequences for violation of agreed rules / codes but shall not entail monetary penalties in any manner.
  • Ability to operate independently and with impartiality, free from the influence of any single member or group of members.
  • Develop standards for improving compliance culture and adherence by its members to the circulars, directions, guidelines, rules and regulations framed by RBI.
  • Devise and implement standardised procedures for handling disputes among members or as directed by RBI, including processes to resolve these disputes through a transparent and consistent dispute resolution / arbitration mechanism.
  • Effective monitoring of developments in the financial markets.
  • Strive to develop the sector and ensure the standards / best practices prescribed are in compliance with, and within the applicable statutory and regulatory instructions. The standards / best practices set for adoption by its members shall not be a substitute to any applicable statute, or regulatory circulars, directions, guidelines, rules and regulations.

What shall be the objectives of SROs?

An SRO is expected to achieve the following objectives –

  • Promote a culture of compliance among its members. SRO shall extend guidance and support, particularly to the smaller entities in the sector, and share best practices aligned with statutory and regulatory policies. For this purpose, the SRO should frame and implement a comprehensive code of conduct for its members.
  • Act as the collective voice of its members in engagements with RBI, government authorities and other statutory and regulatory bodies. It is expected that the SRO functions above self-interests and addresses the larger concerns of the sector and financial system as a whole. While acting as the industry representative, the SRO is expected to ensure equitable and transparent treatment for all its members.
  • Examine guidance and best practices prescribed by international standard setting bodies and market practices prevalent in other jurisdictions to identify opportunities for enhancing the functioning of the financial markets.
  • Collect and share relevant sectoral information with RBI to aid in policymaking.
  • Foster innovation and facilitate introduction of new products within the regulatory framework set by RBI.
  • Promote a culture of research and development to encourage innovation while ensuring highest standards of compliance and self-governance.
  • Promote adoption of best practices to ensure transparency and fair pricing for retail and smaller participants while accessing financial markets.

What shall be the eligibility criteria for SROs?

  • The applicant shall be set up as a not-for-profit company registered under Section 8 of the Companies Act, 2013. 
  • The applicant must have minimum net-worth of ₹10 crore. 
  • The shareholding of the SRO should be sufficiently diversified, and no entity shall hold 10% or more of its paid-up share capital, either singly or acting in concert.
  • The applicant must ensure that the membership of the SRO is voluntary.
  • The applicant must adequately represent the sector / market with a good mix of members across different types and sizes of entities. If representation is inadequate at the time of application, a roadmap, not exceeding 2 years, should be included for achieving adequate representation within a reasonable timeline. Failure to demonstrate or attain comprehensive membership would result in refusal or revocation of recognition.
  • The applicant and its Directors must demonstrate professional competence and a general reputation for fairness and integrity, as assessed to the satisfaction of RBI. 
  • The applicant must be fit and proper for the grant of recognition as an SRO, in all other respects. 

What shall be the criteria for the Board of SROs?

At least 1/3rd of members in the Board shall be an Independent Director and without any active association with the category / class of entities for which the SRO is established.

What shall be the responsibilities of SROs towards RBI?

The SRO shall discharge the following responsibilities towards the Regulator –

  • Inform RBI about the developments in the sector on a regular basis. Promptly inform RBI about any act of misconduct or violation, by its member, of the provision of the Acts or the circulars, directions, guidelines, rules and regulations issued by RBI, that comes to its notice.
  • Carry out any work assigned to it by RBI and examine the proposal or suggestion referred to it. Provide data / information, sought by RBI periodically or as advised.
  • Submit an Annual Report to RBI, within 6 months of completion of the financial year. Submit periodic / ad hoc returns as may be prescribed by RBI.
  • Engage in periodic interactions with RBI and look at the larger picture of the industry / sector in offering its views / inputs / suggestions.
  • Provide comprehensive stakeholder feedback on consultations, draft circulars, etc., shared by RBI, in a timely manner.
  • Discharge such other functions and abide by such other directions as specified by RBI, from time to time.
  • RBI may inspect the books of the SRO or arrange to have an independent inspection of the books of the SRO. The expenses related to such inspection shall be borne by the SRO.

How shall the application of SROs be processed?

  • An entity aspiring to function as an SRO shall be required to make an application to RBI for recognition.
  • Where the applicant is deemed suitable, RBI would issue a “Letter of Recognition” to function as an SRO.


References

Reserve Bank of India. (2024, August 19). 'Framework for Recognition of Self-Regulatory Organisations (SROs) in Financial Markets – Invitation of applications'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=58523

Reserve Bank of India. (2024, August 19). 'Framework for Recognition of Self-Regulatory Organisations in Financial Markets regulated by the Reserve Bank'. Retrieved from https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1276


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