Page 227 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes There is a need to streamline the procedures relating to due process. Also, dealing with cases of
suspected fraud often requires freezing the situation, while the legal process is being pursued.
This happens in India, but the decision to freeze the situation often takes time.

14.2.2 Cooperation in Regulation

Various segments of the domestic financial market are getting increasingly integrated. There
have also been progressive linkages between the domestic and international capital markets. As
a result, the regulatory interventions or their absence in one market tend to have repercussions
in other markets that are more serious and more widespread than in the past. Further, with the
emergence of more and more financial supermarkets and growing complexity of financial
transactions, there are increasing instances of the same market intermediary coming under the
purview of multiple regulatory bodies. These factors have raised the potential for regulatory
gaps as well as overlaps, thereby underlining the need for greater cooperation among various
regulators.

Notes Currently, coordination among domestic regulators is occurring through the High
Level Group on Capital Markets (HLGCM) comprising the RBI, SEBI, the IRDA and Finance
Ministry.
The HLGCM has set up two Standing Committees: one for regulatory coordination and the
other for coordination in matters relating to the development of debt markets. The Committee
meets periodically to exchange information and views. Besides, to address specific issues such as
DvP system or asset securitisation, the RBI and SEBI have been coordinating through the
institution of working groups. The Group observes that there is scope to further strengthen the
coordination efforts. There may be merit in formalising the HLGCM by giving it a legal status.
Besides, the HLGCM needs to meet more frequently and its functioning needs to be made more
transparent. Also, a system needs to be devised to allow designated functionaries (not necessarily
only at the top level) to share specified market information on a routine and automatic basis.
As regards coordination with regulators in other countries, the RBI has put in place a system of
exchange of need-based information in respect of international operations. However, the powers
of SEBI to assist foreign regulators or to enter into MOUs or other cooperation arrangements are
not explicitly provided by legislation, although SEBI has signed a MoU with the Securities
Exchange Commission of the USA. Hence, the Group is of view that necessary legislative changes
need to be made to enhance SEBI’s scope in this regard.

Task Write down the market integration and efficiency of Indian stock markets.

14.2.3 Self-Regulation

The SEBI Act provides for promotion and regulation of SROs (i.e., stock exchanges). The stock
exchanges are empowered to make rules and regulations for their members and for regulating
the conduct of respective members. However, self-regulation is not always effective, because
the current ownership and governance structures of many stock exchanges allow scope for
conflict of interest. These exchanges are owned and managed by members who enjoy exclusive
trading rights. In the broker-owned exchanges, brokers elect their representatives to regulate
activities of the exchange, including those of the brokers themselves. This raises fairness issues,

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