In their 205th meeting held in Mumbai on April 30th, The Securities and Exchange Board of India (SEBI) approved enhancements to the SEBI (Mutual Funds) Regulations, 1996. Intended to curtail a recent surge in front-running cases, the updated regulation will strengthen rules surrounding the deterrence and identification of market abuse for Asset Management Companies (AMCs).
Improved controls
The new amendment states that AMCs must implement a “structured institutional mechanism for identification and deterrence of potential market abuse including front-running and fraudulent transactions in securities.”
In particular, these structured institutional mechanisms must consist of enhanced surveillance systems which can identify instances of abusive trading. Such surveillance systems ingest trade data and test for potential instances of abusive or manipulative trading, flagging them for further investigation. (See eflow’s trade surveillance solution TZTS for further detail)
The technology itself, however, is only one part of the equation - these surveillance systems must also be backed up by internal processes. The SEBI board states that, beyond the surveillance technology itself, the institutional mechanism must consist of “internal control procedures and escalation processes to identify, monitor and address specific types of misconduct including front running, insider trading and misuse of sensitive information.”
The specific standards to which these institutional mechanisms must adhere will be outlined by the Association of Mutual Funds in India (AMFI) in consultation with SEBI.
Front running
The decision to strengthen regulations against front-running in particular comes off the back of a series of recent non-compliance cases observed by the regulator.
In February of this year, the regulator barred Viresh Joshi - the former chief dealer of Axis Mutual Fund - along with 20 other individuals from accessing the securities market as a result of alleged front-running. Another recent case saw SEBI ban two individuals from the securities market while imposing over ₹77 lakh worth of fines.
Front running - also sometimes referred to as tailgating - is an abusive trading tactic in which an investor or broker makes a trade while possessing undisclosed inside knowledge of a future transaction which will significantly affect the price of the traded asset.
The particular focus placed on this area of market abuse marks a clear point of emphasis from the regulator going forward.
Communications
As well as these amendments, SEBI’s board approved an exemption for communication monitoring as part of this latest meeting.
The regulator previously mandated all communications by dealers and fund managers to be recorded. However, worries about the strain this rule placed on AMCs have led to SEBI softening this regulation.
The press release accompanying the board meeting states that “the Board approved exemption from the requirement of recording face to face communication, including out of office interactions, during market hours.”
This amendment will be enforced along with the institutional mechanism ruling and aims to maintain proper oversight while fostering a less restrictive working environment.
If your firm is looking to implement a trade surveillance solution capable of monitoring for front-running and other forms of market abuse, book a consultation with eflow today.
