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Regulatory warning: Prashant Saran

Regulatory warning: Prashant Saran

Sebi warns NSE on trade mismatches

Sebi warns NSE on trade mismatches

Mumbai: India’s stock market regulator Securities and Exchange Board of India (Sebi) warned National Stock Exchange of India Ltd (NSE) on Tuesday against being lenient to brokers involved in trade mismatches or so-called client code modifications in 2010.

The department of economic affairs of the finance ministry had alerted Sebi of such mismatches in trades on the NSE platform. Sebi found mismatches worth 55,000 crore in March 2010.

Such modifications allow brokers to change entries that may have been erroneously entered in the wrong client’s name.

Regulatory warning: Prashant Saran

Client code revisions swell towards the end of the fiscal year, according to the Sebi order. This implies that client code modifications may be used to avoid taxes, according to analysts.

“I note that the incidence of modification of client codes is substantially different across months," Saran said in his order. “The total number of modified orders is showing an upward trend during the period between January 2010 and March 2010."

Client code modification is permitted by both Sebi and the stock exchanges to rectify errors that occur during the entry of client codes while placing orders.

Last year, Sebi introduced a penalty on client code modifications in non-institutional trades if the value of the trade so modified exceeded a prescribed limit. The regulator asked stock exchanges to permit client code modifications only in cases of genuine error or wrong data entry by trading members. This facility was provided for the smooth functioning of the system and Sebi expects it to be used more as an exception.

The exchanges were directed to set objective parameters for the identification of client code modifications arising as a result of wrong data entry. The exchanges could impose a monetary penalty and take disciplinary action against members who don’t meet the minimum parameters.

According to the order, NSE had argued that it isn’t possible to determine whether the error is genuine or not. The exchange also held that it was legal to modify client codes and it didn’t matter if the number of the modification happens to be large.

“I am of the opinion that the number of errors is a strong indicator whether errors are genuine or not," Saran noted in the order.

“NSE has taken a laid-back attitude towards the problem and either totally ignored or perfunctorily imposed minor penalties to the brokers. It failed to apply its mind to the unusualness of the happenings. I therefore find that NSE acted negligently in discharge of its regulatory duties," he observed.

An NSE official, who declined to be named, said the exchange is studying the Sebi order.

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