SEBI allows liquidity enhancement scheme in equity cash and derivative segments

Market regulator Securities and Exchange Board of India (SEBI) has revised the framework for providing liquidity enhancement schemes by allowing stock exchanges to introduce such schemes in both equity cash and equity derivatives segments.

Stock exchanges, however, are required to take prior approval of their respective board prior to introducing such schemes and the boards are required to monitor the implementation and outcome of the schemes on a quarterly basis, the regulator said.

The schemes should specify the incentives available to the market makers / liquidity providers. Such incentives may include discount or adjustment in fees in other segments, cash payments or issue of shares, including options and warrants, SEBI said.

The schemes should not be at the cost of market integrity or risk management and the boards of the exchanges are required to review the effectiveness of the scheme every six months and submit half-yearly reports to Sebi.

The exchanges should disclose any modifications or discontinuation of the schemes to the market at least 15 days in advance.

The progress of the schemes, including incentives granted and volume achieved – market maker wise and security wise – should be disseminated monthly.

All schemes should comply with all the relevant laws, Sebi said.

For deciding the eligibility of securities for liquidity enhancement, the stock exchanges should formulate their own benchmarks with the broad objective of enhancing liquidity in illiquid securities, Sebi said.

Sebi has set a three-year limit for stock exchanges to introduce liquidity enhancement schemes on any security.

Once the scheme is discontinued, the scheme can be re-introduced on the same security provided it is less than the three-year period since the introduction of the scheme on that security.

Further, a stock exchange may introduce liquidity enhancement schemes in securities where the scheme has been introduced in another stock exchange. Such schemes cannot be continued beyond the period of liquidity enhancement schemes of the initiating stock exchange, Sebi said.

Stock exchanges should disseminate the list of securities eligible for liquidity enhancement the market.

The incentives under liquidity enhancement schemes should be transparent and measurable, and may be either in the form of discount in fees, adjustment in fees in other segments or cash payment.

The incentives during a financial year should not exceed 25 per cent of the net profits or 25 per cent of the free reserves of the stock exchange, whichever is higher, as per the audited financial statements of the preceding financial year.

Shares, including options and warrants, of the stock exchange, ie, the shares that may accrue on exercise of warrants or options given as incentives under all liquidity enhancement schemed, during a financial year, should not exceed 25 per cent of the issued and outstanding shares of the stock exchange as on the last day of the preceding financial year.

Further, the stock exchange should ensure that this is in compliance with the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 at all times.

The stock exchanges should ensure that systems and defined procedures are in place to monitor collusion between stock brokers indulging in trades solely for seeking incentives and prevent payment of incentives in such cases.

Incentives should not be provided for the trades where the counterparty is self, ie, same Unique Client Code (UCC) is on both sides of the transaction.

Any violations of clauses would be viewed most seriously, Sebi said.

The exchanges may prescribe and monitor the obligations of liquidity enhancers (liquidity provider, market-maker, maker-taker or by whatever name called) and identify all market maker / liquidity enhancer orders / trades.

The stock exchanges should put in place a conflict-of-interest framework for the liquidity enhancement scheme, providing for obligation on the part of the market maker / liquidity enhancer to disclose any conflict of interest while participating in the scheme. The stock exchanges should also disclose this on their website.

SEBI said the revised guidelines will not apply to securities listed on SME platforms or SME exchanges.