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Mumbai: The Reserve Bank of India on Monday issued the framework for self-regulatory organisations (SROs) in financial markets, inviting applications from entities which meet the eligibility criteria including a minimum net worth of ₹10 crore.
The framework has been issued keeping in view SROs’ role in “strengthening compliance culture among their members and also providing a consultative platform for policy making”, the central bank said in a statement. “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.”
Financial markets refer to interest rate markets that encompass government securities; money markets including the market for repo in government securities and corporate bonds; foreign exchange markets; and derivatives on interest rates/prices, forex rates, and credit.
The guidelines are based on the 21 March 2024 omnibus framework for recognising SROs for regulated entities prescribing the broad objectives, functions, eligibility criteria, governance standards, membership criteria and other terms and conditions to be followed by the SROs.
Eligibility and role
As per the guidelines, the SRO for financial markets will need to be set up as a not-for-profit company, must have a minimum net worth of ₹10 crore, and should have the ability to create infrastructure that enables it to discharge responsibilities of an SRO on a continuing basis. The shareholding of the SRO should be sufficiently diversified, with no entity allowed to hold 10% or more of the paid-up share capital, either singly or acting in concert.
The SRO will be responsible for framing necessary best practices/standards/codes within the regulatory framework for voluntary adoption by its members. This compliance culture, established through high levels of internal governance, can help reduce the compliance burden on market participants and promote an ecosystem conducive to the development of the financial markets, RBI said.
The SRO’s role will include promoting a culture of compliance among its members by encouraging progressive practices and conventions and sharing best practices, with special attention on extending guidance and support, particularly to smaller entities.
SROs will also be required to 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 or arbitration mechanism.
The SRO will act as the “collective voice of its members” in engagements with RBI, government authorities and other statutory and regulatory bodies and represent and address broader industry concerns. It will also collect and share relevant sectoral information with the RBI to aid in policymaking, and foster innovation and facilitate introduction of new products.
“SROs can play a vital role in this direction by proactively developing and ensuring adoption and adherence to industry standards and best practices by its members in the financial markets. The self-regulation shall complement the extant legislative/regulatory framework and help further develop the financial markets in terms of enhanced integrity, professionalism, compliance, innovation, and ethical conduct,” the RBI said.