The regulatory puzzle of MIIS

Market infrastructure institutions are being turned into de facto PSUs. Have we failed to find the right balance in their operations?

- AARTHIKAM CHINTANAM

The committee and Exchange constituted by the Securities Board of India (Sebi) to review the governance framework for market infrastructure institutions (MIIS) - such as exchanges recently released its draft report for public comments.

MIIS are unique institutions providing vital infrastructure for trading, settlement and recordkeeping. They are vested with regulatory responsibilities while also pursuing commercial interests like other profit-oriented entities. In view of the conflicting nature of these different roles of MIIS, the governance standards of MIIS need to be robust to engender market confidence and deter malpractice.

Let us first summarise the views of the committee. The report emphasises that the regulatory framework should ensure that MIIS, in pursuance of their business objectives, should not lose sight of the regulatory roles vested in them as the first-line regulators. At the same time, tightening the norms should not deter innovation or customer focused service provision by MIIS.

Accordingly, the report calls for a review of the requirements related to the appointment and the role and responsibility of directors on the board and key managerial personnel (KMPs). In addition, it proposes steps to improve the transparency and accountability in the functioning of MIIS, metrics for the monitoring of their performance and measures for the safekeeping and sharing of information held by them.

On MII structure, it recommends that independent directors must constitute two-thirds of the total strength of the board. It further says that the roles and responsibilities of the directors should be clearly defined, and the board should play an active role in the risk management framework of MIIs. The report notes that operational matters take up a significant time of the board whereas the board should focus on broader strategy, policy and other important matters.