SEBI paper demarcates outsourcing by intermediaries

Our Bureau Mumbai | Updated on January 20, 2011

Regulator invites comments on dos & don'ts

The SEBI has defined the activities that stock market intermediaries cannot outsource to third parties.

In a discussion paper on outsourcing put up on its Web site on Wednesday, SEBI sought comments and suggestions on six issues such as principles for outsourcing, activities that can be outsourced, activities that cannot be outsourced, entities to whom the activities can be outsourced, the terms of outsourcing and responsibilities and obligations of the intermediary and the third party in respect of the outsourced activity towards clients, regulator and market.

Depository participants cannot outsource their checker activities. Registrar and transfer agents cannot outsource their record-keeping and PMLA obligations. Banks have to clear financial instruments on their own and brokers have to manage client orders, pay-in and pay-out of funds and securities said the discussion paper. Similarly, PMS providers and AMCs have to manage client funds while merchant bankers cannot subcontract due diligence, issue pricing and supervision of other intermediaries to third parties.

“SEBI has done the right thing by pointing out what can and what cannot be done,” said Mr Waqar Naqvi CEO Taurus Mutual Fund. “Companies usually outsource only the non-core activities of their business. If they do otherwise, they cease to exist.”

Experts point out that brokers perform execution and clearing functions in India and clubbing both can be challenging for brokers who maintain the bare minimum level of net worth.

“In the US, you have separate entities for trade execution and pay-in and pay-out and hence the net worth requirements are different,” said Mr Atul Gupta, MD, Orbis Financials, a custodial services provider.

SEBI has laid out nine principles that would be applicable to outsourcing.

Intermediaries are expected to put in place a comprehensive policy on outsourcing – whether and how any particular activity would be outsourced. Intermediaries must put in place a comprehensive risk management programme to address the outsourced activities and their relationship with their vendor.

Intermediaries have to ensure that all obligations to customers and regulators are fulfilled and outsourcing does not hinder regulatory supervision. They must also conduct proper due diligence while selecting the vendor and periodically review performance.

Outsourcing relationships have to be clearly laid out in terms of expectations, rights responsibilities, confidentiality and termination describing material aspects in the form of a contract.

Intermediaries and third parties are also expected to maintain and periodically test their facilities for contingency and disaster recovery.

Care must be taken to ensure that confidential information is not leaked by third party, the paper said.

Regulators have to view outsourcing as an integral part of their ongoing assessment of intermediaries.

The final point was that regulators have to take cognisance of the risks that outsourcing may end up in the hands of a select few third parties.

Once implemented, there would a clear demarcation of activities that can and cannot be outsourced by intermediaries.

Published on January 20, 2011

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